BigTrends ACE Coaching

Advanced Position Sizing & Money Management

Course Instructor:

Price Headley, CFA, CMT
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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.

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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.

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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.

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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.

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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.

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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.

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Dryships (DRYS) with ATR

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Google (GOOG) with ATR

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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

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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

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Do You Have Any Questions?

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