This topic is a brief presentation of how fixed and adjustable quantity sizing affects the system's risk profile.  As order sizing methods change so does the risk effect and trading system performance change.  


In this section we are only going to use the tutorial entry exit system we developed earlier as the method for how we will show the risk and performance differences between fixed and risk rate sizing.  


To demonstrate fixed quantity we will use the Basic Money Manager and set the quantity parameter to 1 contract or share, and we will test the trading system from the beginning of 2000 to the current data download date.


At the end of test Trading Blox will generate a graph profile of how the system performed:

Fixed Quantity Order Size of 1 

Basic Money Manager Fixed Order Size Graph


During testing this custom graph created to show the static nature of how the order size of the Basic Money Manager consistently applies the same quantity regardless of how much growth appears in the equity profile graph:

Fixed Quantity Order Size of 1 

Basic Money Manager Fixed Order Size Graph


Our first tutorial system doesn't include a protective exit price as part of its trading logic.  When no protective price is available to generate a position's estimate of loss when trading, the software assumes the risk of loss is infinite and thus shows the Total Risk profiles as being 100% when ever there is a position is active.


In the standard Performance Results Summary report when the Total Risk Profile option is enabled in the Preference section, the reporting will display an estimate of how much risk that system is creating at all the trade days over the period of dates selected.  Position risk is determined by the system's calculation of risk for each of the position active on each date, which is them summarized at the end of each trading record:

Click to enlarge

Basic Money Manager No Protective Exit Price Total Risk Profile

In the above graph the system is exposing the entire account whenever there is an active position.  


When a fixed quantity sizing method is used each order creates a varied risk load on the system's account.  In this next graph generated when the orders were sized that created the equity profile shown above, the variations in each orders risk is so varied it would be hard to estimate and limit the system's open risk.

100k Risk Graph Order =1 

Basic Money Manager 100k Risk Graph Order = 1 

When order risk become so varied it is then hard to limit how many positions can be active so as to limit the entry risk exposure to a preferred risk level.



Adding Protective Exit Pricing:

When the protective prices are used with entry orders, the Total Risk Profile of the system drops down to where it might be expected.  This next graph shows an example of what we might expect when we add our protective prices to the orders at entry, and then keep them in place over the duration of each position:

Click to enlarge

Basic Money Manager Size = 1 with Protective Exit Orders

Total Risk profile has now moved away from finding all the active positions carrying an infinite amount of risk, to a profile of how the probable risk of the system would report if the active positions exited by their protective prices.  Total risk is an estimate of the probable loss that would happen and the amount is based upon the position's quantity times to trade's loss amount if it were to exit at its protective price.


Risk Based Sizing

Risk based sizing determine the entry order quantity based upon how much risk is allowed.  Risk allowed is calculated by multiplying the system's equity amount by user's fixed percentage rate.  This means that a for an account valued at 100,000, a 1% risk rate will allow risk a  allocation of 1,000.  With a risk allocation of 1,000 and an example entry risk of 500, the risk allocation will allow a quantity of two contracts to be assigned to the entry order.

Tutorial System2 Unit Sizing Risk Rate Graph

When the entry risk amount is greater than the allocated amount, a quantity size that is less than the minimum round-lot size will result.  Quantities less than the round-lot specified for the instrument will cause an entry order to be rejected.  Fixed rate sizing is a method for limiting how much risk a position is allow to apply to a system, it also allow the system to create a fixed leverage rate as the account value changes.  


In the graph above the red spikes show the risk rate of the orders that were rejected. Rejections are more frequent at the beginning when the account value is low, or when there is a period where high volatility is dominating the markets.  As the account equity grew, the rejections became less frequent, but the period around 2008 showed a lot of market instability which is a reflection of volatility.


Observations of the green area shows the average risk rate shown is less than the user's parameter risk rate of 1%.  If is less because it often happens the division by the entry risk amount into the allocated amount won't always be an even number.  When the results has a decimal amount, the value is rounded down to the next integer value which creates an average risk rate that is less than the user's established risk rate of 1%.



Operator Reference


This completes this topic.

Edit Time: 5/10/2017 8:24:56 AM

Topic ID#: 632


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