Relationship between bet size and frequency of trades

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dispassionate
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Relationship between bet size and frequency of trades

Post by dispassionate » Tue Sep 19, 2006 7:16 pm

What is the relationship between the % of equity to bet on each trade and the frequency of trades taken?

Presumably the greater the frequency of signals, the smaller the % of account equity each bet should be?

BARLI
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Post by BARLI » Tue Sep 19, 2006 8:17 pm

the more confidence you have in a trade the more is your size :wink:

Paul King
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Post by Paul King » Wed Sep 20, 2006 9:42 am

Higher frequency trading implies a shorter average trade duration (or you would simply end up with too many positions for available capital). Trade duration is determined by how close your stops are to the current price. Shorter trade duration implies tighter stops. Tighter stops means you have to take bigger positions to achieve the same risk as wider stops.

Therefore, my conclusion is that trade frequency is inversely proportional to position size i.e. the higher the frequency of your trading, the bigger the positions you have to take in order to achieve the desired risk per position.

dispassionate
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Post by dispassionate » Wed Sep 20, 2006 8:21 pm

Paul King wrote:Higher frequency trading implies a shorter average trade duration (or you would simply end up with too many positions for available capital). Trade duration is determined by how close your stops are to the current price. Shorter trade duration implies tighter stops. Tighter stops means you have to take bigger positions to achieve the same risk as wider stops.

Therefore, my conclusion is that trade frequency is inversely proportional to position size i.e. the higher the frequency of your trading, the bigger the positions you have to take in order to achieve the desired risk per position.
PMK thanks for your comment. What happens to the risk as a % of equity as trading frequency increases? I suspect that this gets smaller as trading frequency increases, right?

For e.g. a long-term position trader might bet no more than 1% of equity per trade.

I make the assumption that a trader following the same type of system (say trading breakouts) on much shorter time-frames will then have to risk less than 1% of equity per trade? (because of the assumption of higher noise thus more chance of being wrong)

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Post by Paul King » Wed Sep 20, 2006 8:38 pm

The risk will stay the same if you are using a percentage risk position-sizing model i.e. it is independent of trade frequency.

For example if you are trading the S&P 500 emini futures contract which is $50 per point, and your account is $100,000 and you want to risk 1% per trade ($1000) then if your stop is 10 points away ($500) you can trade 2 contracts ($1000 risk / (10 points stop * $50 per point) = 2 contracts.

If your stop is 20 points away you can only trade 1 contract to maintain your risk at $1000 per trade ($1000 risk / (20 points stop * $50 per point))=1 contract.

Note that with this model a stop more than 20 points away would mean you could not even trade 1 contract since that would be more than your $1000 maximum allowed risk.

In these examples your risk per trade has nothing to do with trade frequency. The tighter stop allows for the same risk with more contracts traded regardless of frequency.

Hope this helps

Paul

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Post by dispassionate » Thu Sep 21, 2006 5:04 pm

Thanks for comments.

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