perplexed: Position Sizing
Posted: Thu May 22, 2003 12:00 pm
I didn't know what to call this thread.
Lets say I have a portfolio and one of the markets is Pencils. Using a fixed fractional position sizing method, each individual market tests well on single contract testing.
After a single market test using position sizing I observe that Pencils has a modest +ve sloping EC. However the last 6 months has been riddled with whipsaws. On the single file test, the position size decreased as teh DD grew (thanks to FF) and although the Pencil equity curve went into DD, the results over the full test are fine.
Now consider the situation where the remainder of the portfolio is doing very, very well up to date. In a portfolio test, our capital is growing very fast and position size is increasing. This means that the positions being taken in the Pencil market are also very large. So large that the string of losses over the last 6 months in the Pencil market have been large enough in $ terms to wipe out the modest profit made over the years leading up to the DD.
Now when you look at the performance of each market from the portfolio test, you find that Pencils are losing money overall.
A far simpler example:
- You trade CL and JY.
- your system started 3 years ago with only these markets.
- Both have been winners over the years.
- Position size is growing slowly.
- Then CL returns some huge wins.
- You get a signal to buy JY.
- the position size indicated is double that of the last JY trade.
- the large JY trade is a loser, so are the next 4, but position size for JY is still increasing as CL is a money machine, trade after trade it wins big.
- on a portfolio basis, no big deal that JY is losing.[1]
- but the recent strings of JY losses wipes out all the steady and respectable profit from the last 3 years of trading JY.
- suddenly JY looks like a bad market to trade, even though it has won consistently for the last few 3 years.
Why do I feel like I am going around in circles?
[1] is this line the key to my problem?
Part of me thinks that I should use individual market tests (with position sizing) when determining what markets trade well in a system. when I assess the portfolio results I should focus more on portfolio EC rather than performance of individual markets within the portfolio.
Thankyou for reading my long post.
Lets say I have a portfolio and one of the markets is Pencils. Using a fixed fractional position sizing method, each individual market tests well on single contract testing.
After a single market test using position sizing I observe that Pencils has a modest +ve sloping EC. However the last 6 months has been riddled with whipsaws. On the single file test, the position size decreased as teh DD grew (thanks to FF) and although the Pencil equity curve went into DD, the results over the full test are fine.
Now consider the situation where the remainder of the portfolio is doing very, very well up to date. In a portfolio test, our capital is growing very fast and position size is increasing. This means that the positions being taken in the Pencil market are also very large. So large that the string of losses over the last 6 months in the Pencil market have been large enough in $ terms to wipe out the modest profit made over the years leading up to the DD.
Now when you look at the performance of each market from the portfolio test, you find that Pencils are losing money overall.
A far simpler example:
- You trade CL and JY.
- your system started 3 years ago with only these markets.
- Both have been winners over the years.
- Position size is growing slowly.
- Then CL returns some huge wins.
- You get a signal to buy JY.
- the position size indicated is double that of the last JY trade.
- the large JY trade is a loser, so are the next 4, but position size for JY is still increasing as CL is a money machine, trade after trade it wins big.
- on a portfolio basis, no big deal that JY is losing.[1]
- but the recent strings of JY losses wipes out all the steady and respectable profit from the last 3 years of trading JY.
- suddenly JY looks like a bad market to trade, even though it has won consistently for the last few 3 years.
Why do I feel like I am going around in circles?
[1] is this line the key to my problem?
Part of me thinks that I should use individual market tests (with position sizing) when determining what markets trade well in a system. when I assess the portfolio results I should focus more on portfolio EC rather than performance of individual markets within the portfolio.
Thankyou for reading my long post.