### Equal position size

Posted:

**Tue Apr 22, 2003 10:49 pm**Forum Mgmnt,

One of the interesting points that you have made both in the Original Turtles discussion and separately on this board is that it is important for a trader to maintain equal position size across the various positions she has on. The Original Turtles system does this by establishing the approximate volatility of each market at the time a trade is put on, determining the value of that volatility, and ensuring that at the time a trade is put on the value of that volatility multiplied by the number of contracts put on is equal to a fraction of the account equity value.

With a long term system, unfortunately this fails to ensure that all positions have equal weighting at any particular point in time. Why? Because over the course of a trade (1) the volatility of individual markets will change, and (2) the total amount of equity in the account will change.

As an example, assume the following facts. Trader has a $1,000,000 account on March 1, observes that a new June Widget futures position should be put on, and after observing that the average true range of the June Widget futures contract is 20 points decides to go long 5 contracts. Based on the point value set by the relevant exchange for Widget futures contracts, Trader has calculated that this position will risk 1% of equity, or $10,000. Trader is a long-term trader and will likely hold this position approximately 2-6 months.

Example (1): After 2 months, Trader's account has grown to $1,100,000 as a result of Trader's adroit trading. Trader still has the open Widget position. June Widget futures still have an ATR of 20, so that Trader believes the weight of the Widget position is still $10,000. Trader observes that it is time to put on a new June Buggy Whip futures position. However, because Trader's account has grown to $1,100,000, the new Buggy Whip position will be weighted at $11,000 to achieve 1% risk. The result is that the position weights will not be equal -- the Buggy Whip position will be more heavily weighted than the Widget position that was put on when the account was smaller.

Example (2): Instead, after 2 months Trader's account remains at $1,000,000. Trader observes that the volatility in June Widgets has doubled from an ATR of 20 to an ATR of 40. Thus, the weighting of Trader's Widget position is now 2% of equity, and will be substantially more than other positions put on at 1% of equity.

It would seem that the simple solution to these problems would be to periodically rebalance position sizes across the portfolio based on a renewed analysis of position weighting that considers the current equity level and individual market volatility. Have you put any thought into this?

Best,

Neal Stevens

One of the interesting points that you have made both in the Original Turtles discussion and separately on this board is that it is important for a trader to maintain equal position size across the various positions she has on. The Original Turtles system does this by establishing the approximate volatility of each market at the time a trade is put on, determining the value of that volatility, and ensuring that at the time a trade is put on the value of that volatility multiplied by the number of contracts put on is equal to a fraction of the account equity value.

With a long term system, unfortunately this fails to ensure that all positions have equal weighting at any particular point in time. Why? Because over the course of a trade (1) the volatility of individual markets will change, and (2) the total amount of equity in the account will change.

As an example, assume the following facts. Trader has a $1,000,000 account on March 1, observes that a new June Widget futures position should be put on, and after observing that the average true range of the June Widget futures contract is 20 points decides to go long 5 contracts. Based on the point value set by the relevant exchange for Widget futures contracts, Trader has calculated that this position will risk 1% of equity, or $10,000. Trader is a long-term trader and will likely hold this position approximately 2-6 months.

Example (1): After 2 months, Trader's account has grown to $1,100,000 as a result of Trader's adroit trading. Trader still has the open Widget position. June Widget futures still have an ATR of 20, so that Trader believes the weight of the Widget position is still $10,000. Trader observes that it is time to put on a new June Buggy Whip futures position. However, because Trader's account has grown to $1,100,000, the new Buggy Whip position will be weighted at $11,000 to achieve 1% risk. The result is that the position weights will not be equal -- the Buggy Whip position will be more heavily weighted than the Widget position that was put on when the account was smaller.

Example (2): Instead, after 2 months Trader's account remains at $1,000,000. Trader observes that the volatility in June Widgets has doubled from an ATR of 20 to an ATR of 40. Thus, the weighting of Trader's Widget position is now 2% of equity, and will be substantially more than other positions put on at 1% of equity.

It would seem that the simple solution to these problems would be to periodically rebalance position sizes across the portfolio based on a renewed analysis of position weighting that considers the current equity level and individual market volatility. Have you put any thought into this?

Best,

Neal Stevens