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There should be a limit

Posted: Tue Jul 20, 2004 3:19 pm
by smodato
Hi everybody, I read several threads here and 'm also reading Ryan Jones work, I'm really fascinated by the scenario I'm discovering but I have a question (or a doubt maybe).
Theoretically we start from very few contracts to possibly increase them using a valid strategy. let's suppose everything works well (I'm still in theory), I believe there must be a limit at a certain point, on mininasdaq for example it'd be ard to trade 2000 what should the behaviour in this lucky situation be (I suppose many of us would be glad to face this particular problem), I can't increase the bet size due to market limits, should I continue with the reached maximum tradeble size or should it be managed as well somehow? Increasing woul not be possible in practice but it would be in theory, so I could hypotetically increase the size and decrease it accordingly in case of losses and at alst really decrease it when theorical size gets under that maximum tradeble size.
I better explain with an example.
Suppose we reach 2000 units and this is the maximum affordable for the kind of market we are trading, we go on in winners and we would have reached 6000 units still trading with 2000, now we get losses and we should have decreased to 4500 but we are still trading with 2000 and we go ahead with that, more losses and we get to 1900 and only now we really decrease the bet size.
Does this make sense or am I just playing with philosophy?

Posted: Tue Jul 20, 2004 3:29 pm
by blueberrycake
Yes, when you approach a certain size in a given market, you have to switch to fixed amount per trade. While the scenario that you provide (Mini-Nasdaq) is highly unrealistic for all but the largest hedge funds, a large short-term trader in thin markets like propane and palladium, will have a maximum amount that he can trade without incurring excessive slippage.

Unless you are starting out with an eight figure brokerage account or plan to trade the thinnest markets out there, I wouldnt worry much.


Posted: Thu Jul 22, 2004 5:21 am
by smodato
Thanks for the reply, I've got another concern to tell the truth, playing with the numbers on my strategies the outcomes are astonishing even keeping the number of contracts within acceptable limits, obviously together with very large winning trades also bad periods come to reality and with many contracts acceptables drawdowdns are trasformed into horrible losses. I t does not metter if this month I lose 1 million dollar confident to gain 2 millions next month, 1 million seems just to be too much.
What happens in reality? i ask thi s to who is trading with really big money, you could answer to limit the number of contracts to something psycologically acceptable in case of losses but this a subjective problem, I wonder what real traders do, we sall know Larry Williams lost nearly one million dollar in the last weeks of the famous year he won the championship, but that was a championship and risk can be increased in those occasions.
I hope I made my point understood :?


Posted: Thu Jul 22, 2004 12:12 pm
by leonardo
Utility theory strikes again.

If your individual trades are risk-adjusted appropriate to the money you are managing, being down $1 million one day and being up $2 million the next is no different than being down $10,000 one day and being up $20,000 the next for an account 1/100th the size.

Money managers don't worry about the volatility if it fits their normal trading profile. If it is possible for a trading account to be up or down a few million a day, likely the account is already in the hundreds of millions.

For those who trade with a greater than 30% annual expectation, a daily equity change of 2%(or more) is a regular occurance.

If you are trading a system for yourself, and you start with $50,000 and after 10 years you build it to $20,000,000 (61.5% annual return); you may choose to stop or pare back your risk instead of going for the expected $8,000,000,000 in the next 10 years.
Compound Interest calculator- Here

If you choose to continue at the same risk profile that made you the money initially, and the markets oblige you by being deep enough to handle your action; you can expect 5% daily equity swings--- $400,000,000 up or down a day.

At some point, a person's risk tolerance cuts in and says, "enough". That is the essence of utility theory.

For a "correct" description of utility theory click on this link.