Forex System Development Workshop. Basics #4: Through Position Sizing.

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1 Forex System Development Workshop Basics #4: Title goes Achieving here Your Goals Through Position Sizing

2 Welcome G day, Howdy, Guten Tag, Ni Hao, Вітаю, Hallo, Konnichiwa, Chào and welcome to session #4 of the Forex System Development Workshop.

3 Live and Interactive Don t be a Shy Sally or a Bashful Barry, ask questions, take your time.

4 Review of Session #3 In session #3, we discussed trading the right strategy for the current market type.

5 Review of Session #3: The Concept Not the Method The exact method is not as important as the concept of trading the right strategy for the market type.

6 Review of Session #3: Entries and Exits Are a Different System You identify the market type then use a different system to enter and exit.

7 Questions About Session #3

8 Forex System Development Workshop Title Achieving goes hereyour Goals Through Position Sizing

9 What is Position Sizing? Your position sizing strategy helps you to determine how much equity to risk on every trade. Its purpose is to help you meet your objectives Van Tharp

10 The Basics of Positon Sizing

11 Top Traders Think in Terms of Risk vs Reward (R-multiples) An R-multiple is a way of expressing your trade in terms of risk. Learn more: FCST Lesson #5

12 R-multiple Example If you place a trade with a stop-loss 100 pips away from the market, and you are buying a standard lot, then your loss would be (roughly) $1000 if the trade went against you. This initial loss of $1000 is your 1R risk. The R, of course, stands for risk.

13 R-multiples Can Be Expressed Differently All of these are valid ways: As a percentage, for example 1Rp (percent) = 1% In pips, for example 1Ru (unit) = 100 pips In dollars, for example 1Rt (total risk) = $100

14 Your R-multiple is Calculated in Terms of Your Objectives The most important for us today is percent risk. To determine what is right for you go back to your objectives from session #1. Learn more: FCST Lesson #5

15 Meeting Your Return Objective Take your objectives from session #1 Targeted Return Number of Trading Opportunities Targeted Win Rate Targeted Risk Reward

16 Simple: Fixed Percent of Equity Formula Input your objectives into the spreadsheet to determine your starting position size.

17 Example: Percent of Equity

18 Managing Your Drawdown Objective Take your drawdown objectives from Session #1 Maximum drawdown Percent chance of your maximum drawdown occurring

19 Simple: Positon Size Reduction Threshold Input your data into the spreadsheet to determine when you should reduce your position size and by how much.

20 Example: Managing Drawdowns

21 Discussion point: Understand the Distribution of R-multiples in your System Does your system typically have lots of winners or losers in a row? This can impact how you manage drawdowns.

22 Protecting Your Core Equity Trade at a much smaller size until your account is in profit. The most important thing is to keep enough powder for a comeback Marty Schwatrz

23 Example: Core Equity

24 Notional Funding You may only allocate a fraction of your full account size to your broker. You will need to adjust your position size for this.

25 Example: Notional Funding

26 Discussion Point: The Better Your System the More You Can Risk The better your system works in the current market type the more you can risk. One of the fundamentals that you as a trader must know is how to evaluate the effectiveness of your trading methodology. Van Tharp, Market Wizard

27 The Nitty-Gritty of Position Sizing

28 Portfolio Heat What is the maximum amount of risk you will allow on your account at any one time? Number of positions at one time % of account at risk at one time The moral is you have to know your net exposure comfort zone. Jack Schwager

29 Example: Portfolio Heat If you have seven trades on, all risking 1%, then your portfolio heat would be 7% (7 x 1%).

30 The Right Amount of Portfolio Heat As a general rule most systems should not have a portfolio heat of above 15%.

31 Discussion Point: Adding Additional Positions When your positions have had the profit locked in, you can add new positions.

32 Group Control: Correlations Often trades in several currency pairs will have a high degree of correlation. If you have too many correlated positions it can be like holding one big position.

33 The Basket Approach If you want to take multiple correlated positions you can allocate a risk percent to a group of trades.

34 Example: The Basket Approach You allocate 3% risk to long USD positions. If you want to take 3 trades you would risk 1% each. If you want to take two trades you would risk 1.5% each.

35 Synthetic Positions If you are holding a long and short position in the same currency then you will end up with a synthetic position.

36 Example: Synthetic Positions If you are holding a long AUDUSD trade and a short EURUSD trade you effectively have a short EURAUD trade.

37 Discussion point: Limiting Your Focus You could choose to focus on trading only a small number of pairs to avoid confusion around synthetic positions and correlations.

38 Open vs. Closed Risk You can calculate your risk based off your open account equity or off your closed account equity.

39 Different Trade Types You may want to allocate different risk amounts to short-term trades compared to long-term trades.

40 Example: Different Trade Types For example: Short-term % Medium-term % Long-term %

41 The Power of Markets Money

42 What is Markets Money? Markets Money is the concept of using profits to trade larger to improve your returns. When I am more attuned to the market and playing with market money, I will increase my position size. Scott Ramsey Learn more: FCST Lesson #7 & 18

43 Closed Trade vs. Open Trade You can use markets money on: Profits you have made on your account Profits you have made during a trade

44 Examples of Markets Money in Action: Closed Trade Once you are up by 5% a month you increase your position size from 0.5% to 1%.

45 Examples of Markets Money in Action: The Stanley Druckenmiller Method Grind out the first 30% for a year and then go for a 100% year. The way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you re making good profits. Stanley Druckenmiller

46 Examples of Markets Money in Action: Open Trade When you are up by 2R in a trade you tighten your stop and double your position size. It helps greatly to have a long-term objective that you have derived by really doing your homework. You combine the longterm objective with the protective stop that you move as the position goes your way. Gary Bielfeldt

47 Examples of Markets Money in Action: Open Trade

48 When Does Markets Money Become Core Capital At what point do you turn markets money into core capital? A time period, such as a year A profit objective such as 50% A combination of the two

49 Position Sizing For Day Trading

50 Day Trading Has It s Own Unique Challenges When day trading you should have very strict rules about: Maximum number of positions you take in a day Maximum number of positions you hold at any one time Maximum loss in a day before you stop trading

51 Ken Long s Bullet Method Ken Long, an instructor with Van Tharp developed the Bullet Method specifically for day trading.

52 Ken Long s Bullet Method Divide your capital into several bullets which you can fire each day. That is the number of trades you can place in a day.

53 Ken Long s Bullet Method If you have a winning trade you can add to or top-up your bullets.

54 Ken Long s Bullet Method If you want to scale-in to a position you can fire a second bullet on the same trade.

55 Ken Long s Bullet Method If you get down to your last bullet you can split it in half.

56 The 2&10 and 2&25 Position Sizing Models Both of these models reduce your trade size if your account goes into a drawdown and increases position size as you go into profit. Learn more: The Position Sizing Portal

57 Example:The 2&10 and 2&25 Position Sizing Models

58 Discussion Point: Combining 2&25 With the Bullet Method Use the 2&25 to work out your risk for the day and then divide it into bullets.

59 Position Sizing Across Multiple Systems

60 Each of Your Systems Should Work Together to Achieve Your Goals While each system should have it s own objectives and position sizing model, they should work together to achieve your overall goals.

61 Objectives of the System You may decide to allocate more to a conservative long-term growth strategy than to an aggressive system for example.

62 Amount of Leverage Required Some systems will require more leverage than others, which could be a factor in your allocation.

63 Correlations Across Systems Some systems may be correlated, or even hold the same currency pair at the same time.

64 System Quality You may want to allocate more to higher quality systems.

65 The Maximum Drawdown of Each System You may want to allocate more capital to a system with a lower drawdown threshold.

66 The Holding Period of Each System (Daily, Weekly, Monthly) A day trading discretionary system may require less capital than a long-term trend following system.

67 The Recent Performance of Each System If a system is going through a rough patch, you may increase or decrease its capital allocation depending on its recovery profile.

68 The Current Market Type You may decide to increase or decrease your allocation to certain systems in unfavourable market types (this includes decreasing it to zero).

69 Questions

70 Forex System Development Workshop #1 Discussion Points Title goes here

71 Your Session #2 Plan Your entry and exit rules from session #2 are simply there to achieve the win rate and risk/reward ratio component of your objectives.

72 Use the Models for Your Purpose Feel free to adapt the models to any purpose that fits your personality and trading style.

73 Forex System Development Workshop #1 Questions, Queries, Title goes Feedback here

Forex System Development Workshop. Basics #1: Your Trader Type.

Forex System Development Workshop Basics #1: Title goes Five here Steps to Selecting Your Trader Type www.fxrenew.com Welcome G day, Howdy, Guten Tag, Ni Hao, Вітаю, Hallo, Konnichiwa, Chào and welcome