Optimal Position sizing based on Win/Loss ratio | Forex Factory

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Optimal Position sizing based on Win/Loss ratio

  • #1
  • First Post: Jul 7, 2012 5:18am Jul 7, 2012 5:18am
Please i have a quick question, i have a mechanical system i am currently trading that does really well, i bought Forex tester and backtested it from 2001 until 2012 and it did quite well.

System result
Wins 75%
Loss 25%
Max Draw down 3%
Annual return 15% - 25%
Average wins 49pips
Average loss 50pips
Probability of 3 consecutive Losing trade 5%


I have been using the fixed percentage of account size to determine position size, risking between 0.5% to 2%. However i feel that it is not optimal for a system with this track record.
Does anybody know a risk management formula that takes into account the win/loss ratio and average wins vs average loss in order to determine the position size.

Will really appreciate any input, Thank you
  • #2
  • Jul 7, 2012 6:55am Jul 7, 2012 6:55am
Check Perry Kaufmann's smarter trading book.
  • #3
  • Jul 7, 2012 7:36am Jul 7, 2012 7:36am
Quoting olsen-yersen
Check Perry Kaufmann's smarter trading book.
Hello thank you for the recomendation, will check out the book.
  • #4
  • Jul 7, 2012 9:11am Jul 7, 2012 9:11am
Check out chris capre risk of ruin...

I would also suggest have another look at the money management, if you can get a more positive R/R for a slightly lower win rate that would be more favourable...imo
tradewith60
  • #5
  • Jul 7, 2012 9:24pm Jul 7, 2012 9:24pm
Quoting 60minuteman
Check out chris capre risk of ruin...

I would also suggest have another look at the money management, if you can get a more positive R/R for a slightly lower win rate that would be more favourable...imo

Thanks so much, this is exactly what i am looking for, the link for the calculation page is below, very helpful.

2nd link also calculates the probability of a system having a certain % drawdown based on win rate, risk reward, and % risk per trade.

Thank you guys...what will i do without FF ;-)

www.wisertrader.com/newsletter_sub/calc_risk.php

http://www.automated-trading-system....culation-tool/
  • #6
  • Jul 8, 2012 1:17am Jul 8, 2012 1:17am
0.9898% (by widen Kelly critera for optimal account growth)

if you give me your standard deviation of wins and standard deviation of losses I'll calculate it more precisely
  • #7
  • Jul 9, 2012 11:51am Jul 9, 2012 11:51am
very usefull in figuring out how much to risk per trade are the monte carlo simulations. for this kind of system you can risk 2% of your account on any given trade. you can expect that you will never ever have a 30% drawdown. do the simulations yourself. by the way ...how many trades per month?
  • #8
  • Jul 10, 2012 4:23am Jul 10, 2012 4:23am
Quoting Rikers
0.9898% (by widen Kelly critera for optimal account growth)

if you give me your standard deviation of wins and standard deviation of losses I'll calculate it more precisely
Hi thanks for the effort, i dont really know how to calculate standard dev, also the data is quite large
  • #9
  • Jul 10, 2012 4:29am Jul 10, 2012 4:29am
Quoting deltatrade
very usefull in figuring out how much to risk per trade are the monte carlo simulations. for this kind of system you can risk 2% of your account on any given trade. you can expect that you will never ever have a 30% drawdown. do the simulations yourself. by the way ...how many trades per month?
Hey thanks for the info, i will check out monte carlo stuff, my aim is to keep draw down to maximum of 10%.
I need to figure out the optimal amount to risk in order to achieve maximum return possible, at the same time keeping the probability of having a drawdown of more than 10% very low or to zero.
  • #10
  • Jul 10, 2012 7:06am Jul 10, 2012 7:06am
Quoting deltatrade
by the way ...how many trades per month?
Some months no trade signal, however on average it generates 3 to 7 signals per month.

Cheers
  • #11
  • Sep 18, 2012 9:44am Sep 18, 2012 9:44am
Quoting Deman-Uc
System result
Wins 75%
Loss 25%
Max Draw down 3%
Annual return 15% - 25%
Average wins 49pips
Average loss 50pips
Probability of 3 consecutive Losing trade 5%
You system expectancy = 36.75 - 12.5 = 24.25 pips per trade
You will earn the money as long as your system is positive expectancy.

Quoting Deman-Uc
I have been using the fixed percentage of account size to determine position size, risking between 0.5% to 2%. However i feel that it is not optimal for a system with this track record.
Does anybody know a risk management formula that takes into account the win/loss ratio and average wins vs average loss in order to determine the position size.
Go to search for fix fractional or fix ratio trading. You will be surprise for the outcome of your profit to be increased. Purpose is to compound your profit meanwhile control the risk as long as your strategy system is positive expectancy.
  • #12
  • Sep 18, 2012 12:08pm Sep 18, 2012 12:08pm
hopefully you are not going of "back testing" as measure of the performance of your system.

and take into account that it is a mechanical system therefore when market conditions change your system will perform poorly, you need to collect data from trades that you actually make not back testing.

most indicators re paint, and you get this "cannot fail" strategies that do not live up to real market randomness condition.
AVT INVENIAM VIAM AVT FACIAM
  • #13
  • Sep 19, 2012 1:10am Sep 19, 2012 1:10am
Quoting the redlion
hopefully you are not going of "back testing" as measure of the performance of your system.

and take into account that it is a mechanical system therefore when market conditions change your system will perform poorly, you need to collect data from trades that you actually make not back testing.

most indicators re paint, and you get this "cannot fail" strategies that do not live up to real market randomness condition.
this is the best advice ....forward test for atleast 30 trades to get the real world feel...maybe with 1% risk first.
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
  • #14
  • Sep 19, 2012 2:57am Sep 19, 2012 2:57am
Quoting Deman-Uc
Does anybody know a risk management formula that takes into account the win/loss ratio and average wins vs average loss in order to determine the position size. Will really appreciate any input, Thank you

Hi, Good question.
There are plenty of books and posts on this subject. Ralph Vince wrote some pretty mathematical books all about this and will give you everything you need to consider on position sizing and money management.

However, this is all theory but we trade in the real world and need to be somewhat more pragmatic in practice; the world is not as neat and tidy as in the books!

I'd suggest you take any method that: 1) limits your risk per trade to a personally comfortable level; 2) allows the position size to grow without increasing that risk; 3) does not permit account blowup from a bad trade or bad run of trades; 4) is a simple a method as you can make it; and 5) suits your trading psyche.

It's more important that you have a simple method that works adequately that you apply all the time without fail, rather than struggling on for some theoretically perfect optimal method.

Hope some of that helps
  • #15
  • Sep 20, 2012 4:33am Sep 20, 2012 4:33am
Quoting Deman-Uc
Does anybody know a risk management formula that takes into account the win/loss ratio and average wins vs average loss in order to determine the position size.

Will really appreciate any input, Thank you
Why dont' you apply neural network and/or GA to determine the optimal position size?I think NN/GA can be the answer.
  • #16
  • Last Post: Sep 20, 2012 4:49am Sep 20, 2012 4:49am
OP, take a look at the spreadsheet this guy posted in a thread where I was asking roughly the same thing - working out maximum losing streaks to optimise position sizing.

The spreadsheet's a mini work of art. Didn't seem to do much for most others, but take a look

http://www.forexfactory.com/showthread.php?t=236755
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