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Relative Volatility

  • #1
  • First Post: Feb 10, 2011 1:18am Feb 10, 2011 1:18am
Hi apart from averaging a position based on the average trading range of a given set of pairs to calculate how big a position to put on each one

E.G

Position size of 4 lots...

GBP: Average range = 150
AUD: Average Range = 80
Total = 230

Therefore

AUD: 80/230 = 35%
GBP: 150/230 = 65%

GBP: 35% of 4 lots = 1.4 lots
AUD:65% of 4 lots = 2.6 lots


Is there a better way that anyone knows of to distribute positions sizes over multiple pairs? I can't really think of any that wouldn't involve and indicator. The problem is that the Average daily range no matter how many periods its over is just an average and may not represent current volatility.

Any ideas?

Thanks
Time hides Nothing
  • #2
  • Mar 8, 2011 2:54pm Mar 8, 2011 2:54pm
Quoting CindyXXXX
Hi apart from averaging a position based on the average trading range of a given set of pairs to calculate how big a position to put on each one

E.G

Position size of 4 lots...

GBP: Average range = 150
AUD: Average Range = 80
Total = 230

Therefore

AUD: 80/230 = 35%
GBP: 150/230 = 65%

GBP: 35% of 4 lots = 1.4 lots
AUD:65% of 4 lots =...
I im more into asessing probability of the entrence and using that as a measure of position size. So if its not that good an entry = small position,
if its pretty good = little bigger position. But i mean its all a part of the bigger picture how you trade and stuff. If you rely on statistics then scaling in and out is smart i think. If you rely on high accuracy with indicators or what ever may be the case, then using only one size i think is best. And if you use discretionary PA then maybe a fixed SL, TP and size is best.
My signature is: "Classified".
  • #3
  • Mar 8, 2011 4:03pm Mar 8, 2011 4:03pm
Quoting CindyXXXX
Hi apart from averaging a position based on the average trading range of a given set of pairs to calculate how big a position to put on each one

E.G

Position size of 4 lots...

GBP: Average range = 150
AUD: Average Range = 80
Total = 230

Therefore

AUD: 80/230 = 35%
GBP: 150/230 = 65%

GBP: 35% of 4 lots = 1.4 lots
AUD:65% of 4 lots =...
Within the context of a statistically testable system your question has a fairly precise answer expressed in terms of hit-rates and risk-reward ratios for the respective pairs in addition to the correlation between the two types of trades.

The ATR wouldn't so much tell you what size of position to put on as where to place your stop and take-profit levels. And if your systems trades on the 5 minute time-frame the average daily range matters less, but perhaps ATR over the last three or four bars would be a relevant measure of volatility and hence an indication of where to put your stop and take-profit level.

Makes sense?
  • #4
  • Mar 8, 2011 7:24pm Mar 8, 2011 7:24pm
Quoting CindyXXXX
Hi apart from averaging a position based on the average trading range of a given set of pairs to calculate how big a position to put on each one

E.G

Position size of 4 lots...

GBP: Average range = 150
AUD: Average Range = 80
Total = 230

Therefore

AUD: 80/230 = 35%
GBP: 150/230 = 65%

GBP: 35% of 4 lots = 1.4 lots
AUD:65% of 4 lots =...
There are infinite ways of approaching this. One idea is that you could borrow money from friends and relatives, find a broker with 500:1 leverage ( one that will accept credit cards). Then just load up, close your eyes, hold your nose and pray. Good luck
  • #5
  • Mar 8, 2011 8:01pm Mar 8, 2011 8:01pm
It depends on the basis of your strategy. I do the same thing you described, but I'm a carry trader so I use rate bids like this:


Attached Image
  • #6
  • Mar 8, 2011 10:22pm Mar 8, 2011 10:22pm
Quoting Herd_master
There are infinite ways of approaching this. One idea is that you could borrow money from friends and relatives, find a broker with 500:1 leverage ( one that will accept credit cards). Then just load up, close your eyes, hold your nose and pray. Good luck
now why didn't I think of that
Time hides Nothing
  • #7
  • Mar 8, 2011 10:25pm Mar 8, 2011 10:25pm
Quoting medici
Within the context of a statistically testable system your question has a fairly precise answer expressed in terms of hit-rates and risk-reward ratios for the respective pairs in addition to the correlation between the two types of trades.

The ATR wouldn't so much tell you what size of position to put on as where to place your stop and take-profit levels. And if your systems trades on the 5 minute time-frame the average daily range matters less, but perhaps ATR over the last three or four bars would be a relevant measure of volatility and hence...
Thanks Merdici that was another approach I tried to try and gauge the "current" conditions by using the past few bars.

One problem with that is that if its say the H1 TF and the last few bars of one were accumulating volume and the last few bars of the other was ranging then it may give weight to the ranging pair but once the accumulating pair breaks out the lesser range one will have more money behind it and hence probably result in a bigger move. Opposite to what the "ranges" suggested. If that makes sense

With that said the last few bars have been more accurate than the daily range of the past 15 days.

Thanks
Time hides Nothing
  • #8
  • Edited 10:47pm Mar 8, 2011 10:31pm | Edited 10:47pm
Quoting capitalist88
It depends on the basis of your strategy. I do the same thing you described, but I'm a carry trader so I use rate bids like this:


Attachment
Thanks Capitalist, interesting idea. Sorry for my ignorance but what is an Interest rate bid? Cheers

@ Yaed et al.

Seeing as I'm only intraday trading mostly apart from the occasional trade that runs for a few days I've settled for simplicity and just gone half and half on each and it still seems to have the desired result. However its still not ideal becasue the strategy and result of the trade is dependent on both pairs, the individual pairs are not independent trades.

Another thing was to simply trade the cross pair if it were two majors and this solved the problem only thing with that is that now the flexibility is lost to ditch the weak side and hold the strong side. My entire trade is now consolidated into one pair instead of the added flexibility of two pairs.

Quite a conundrum...Perhaps some kind of ratio related to the spread may also suffice.
Time hides Nothing
  • #9
  • Mar 8, 2011 11:10pm Mar 8, 2011 11:10pm
Quoting CindyXXXX
now why didn't I think of that

Maybe because you don’t want to become lonely
  • #10
  • Last Post: Mar 9, 2011 12:52pm Mar 9, 2011 12:52pm
Quoting CindyXXXX
Thanks Capitalist, interesting idea. Sorry for my ignorance but what is an Interest rate bid? Cheers
Oanda (and probably brokers in general) use a spread when quoting rates for swap. So for example, today's Oanda quote on AUD is:

AUD 4.4500 4.9500 Tue Nov 2 10:39:57 2010

If you're long AUD, you'll receive the bid rate of 4.45% and if you're short you'll pay the ask rate of 4.95%

This way, they make money on the swap spread in addition to spreads on filled orders. Helps make money from the set of traders who fill infrequently.
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