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Advanced Position Sizing and Risk Management

This document provides an overview of an advanced coaching course on position sizing and money management taught by Price Headley. The course discusses key concepts like position sizing, average true range (ATR), progressive money management, and reward-to-risk ratios. It summarizes research that found the "percent volatility" model of position sizing based on a stock's volatility returned the highest profits of over 20% annually when backtested on a portfolio starting at $1 million over 5 years.

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2K views

Advanced Position Sizing and Risk Management

This document provides an overview of an advanced coaching course on position sizing and money management taught by Price Headley. The course discusses key concepts like position sizing, average true range (ATR), progressive money management, and reward-to-risk ratios. It summarizes research that found the "percent volatility" model of position sizing based on a stock's volatility returned the highest profits of over 20% annually when backtested on a portfolio starting at $1 million over 5 years.

Uploaded by

bigtrends
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 12

BigTrends ACE Coaching

Advanced Position Sizing & Money Management

Course Instructor:
Price Headley, CFA, CMT
BigTrends.com
BigTrends Coaching

Access to Big Trends and its coaching services is provided for


educational and informational purposes only. The information presented
here does not constitute a recommendation to buy or sell a particular
investment. You are solely responsible for your investment decisions, and
BigTrends and its staff are not responsible for any trades you choose to
make. Not all Big Trends products or services are appropriate for all
investors. BigTrends does not provide personalized financial, tax or legal
advice. Please consult your tax consultant prior to making any investment
that may impact your tax situation.

BigTrends.com
Page  2
What is “Position Sizing” ?

 Resource:Van Tharp
Book: Trade Your Way to Financial Freedom

Van Tharp tested 4 models, with the same system, starting at $1 million with 595 trades
over 5+ years

Result # 1 - Worst … the “baseline model” which bought 100 shares of stock
whenever a signal was given. That model returned $32,567 or 0.58%
annualized.

BigTrends.com
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What is “Position Sizing” ?

 Resource:Van Tharp
Book: Trade Your Way to Financial Freedom

 “Fixed Amount” model: This method traded 100 shares per each $100,000 in
equity. It returned $237,457 or 5.75% annualized.
 “Equal Leverage” model: Each position in this model was 3% of the account
equity. To begin each position was $30,000. This method returned $231,121,
just less than the Fixed Amount model.

BigTrends.com
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What is “Position Sizing” ?

 Resource:Van Tharp
Book: Trade Your Way to Financial Freedom

 “Percent Risk” model: Positions were sized so that the initial risk exposure was
1% of the account equity. So with $1,000,000 equity the initial risk would be
$10,000. If the initial stop on a trade was $2 the system would trade 5,000
shares (or 10,000 shares at $1 risk, 20,000 shares at 50 cents risk and so on).
This model returned $1,840,493 or 20.92% annualized.

BigTrends.com
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What is “Position Sizing” ?

 Resource:Van Tharp
Book: Trade Your Way to Financial Freedom

“Percent Volatility” model: Positions were sized based on each stock’s volatility
— the more volatile the stock, the less shares traded. In this test, positions
were set at 0.5% volatility (initially $5,000 per position) — so if a stock’s
Average True Range was $1, the system would trade 5,000 shares. This model
returned $2,109,266
or 22.93% annualized.

BigTrends.com
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What is “Average True Range” ?

 Welles Wilder’s book New Concepts in Technical Trading Systems (1978), defined the Average
True Range (ATR) indicator to measure a security's volatility. The indicator does not provide an
indication of price direction or duration, simply the degree of price movement or volatility.
 A volatility formula based on only the high-low range would fail to capture the actual volatility
created by the gap or limit move.
 Wilder started with a concept called True Range (TR) which is defined as the greatest of the
following:
 The current High less the current Low.
 The absolute value of the current High less the previous Close.
 The absolute value of the current Low less the previous Close.

BigTrends.com
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Dryships (DRYS) with ATR

BigTrends.com
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Google (GOOG) with ATR

BigTrends.com
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Progressive Money Management

Basic Principle
Make the stock PROVE it to you that it is moving, and so start SMALL and ADD at each
%R RETEST level

Example:
Let’s look back at the GOOG Chart…Most Progressive strategies would say Add at each
new ATR level (ie if GOOG’s ATR is 20 points, and you get a short at 650, then short
more at 630, more at 610, etc. until you hit a stop point of 2 ATRs from the low…

I prefer %R for low risk entries as you may be chasing moves if based on ATRs

BigTrends.com
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Reward-to-Risk

For me, it’s all about how much REWARD I can make
for each increment of Risk

Van Tharp calls this the R MULTIPLE

For every 1 Point of R (capital risked)


how much can you expect to make?

I like to see R Multiples of 3-to-1 or higher

PERCENT R RETESTS give me the lowest risk entries and the highest R Multiples

BigTrends.com
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Do You Have
Any Questions?

BigTrends.com
Page  12

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