Equal Value vs Equal Size

I tried to weight the size of trades based on the value of the overall trade early on and I found it cumbersome and I ended up being selective as to when I would choose to apply the rule strictly and when I might fudge it based on my judgement, whether right or wrong.

Hence I ended up adopting the same sizing rule. I must say that it is working well. Of course some downsides are that I will be trading a smaller priced option for less potential profits as the trade is closed out for a smaller dollar value gain even though it may be the same percentage gain based on the option price.

So, taking a minimum trade size of 2 contracts and starting with $6,700, roughly my startup, and comparing it against sizing according to a 10 concurrent trade at $670 per trade the results are interesting.

All trades taken since March 1st, 217 trades.

2 contracts every trade = 121% gain over all
2 - 26 contracts per trade based on $670 trade value = 206% gain overall

Based on scanning the spreadsheet I would say that about half or more were 2 contract trades so the difference in performance might not be as great as it could be. So, let's bump up to a $25,000 account and see.

At $25,000 splitting into 10 trade sizes leaves $2,500 per trade. Comparing that against an average price of $2.68 per contract producing a 9 contract per trade possibility for every trade the results are interesting, if not as profound as I expected.

9 contracts every trade = 207%
3 - 100 contracts = 283%
3 - 50 (the accepted sizing cap) = 259%

As the account grows and the trade sizes grow with it the difference gets less pronounced again, especially as I need to introduce a trade size cap into the equation. I figure that a cap of 50 contracts per trade is about where it should be, even though 10-15 is the suggested maximum I have reasons and methods to use the higher count to not affect the trade setups or to at least equate the option trade to a stock equivalent.

So a $50,000 account with a 50 contract cap:
18 contracts per trade = 215%
6 - 50 contracts = 256%

This leads me to question how much of an advantage same sizing based on trade value is over same sizing based on contract quantity per trade. Taking this a little farther, and not getting too complicated, I took the cumulative profit for all of the trades based on $6,700, $12K, $25K, $37.5K and $50K and treated the current trade count as if it were a quarter's worth of trading (close) and compared them. I bumped to the next level each quarter for five quarters.

over the period 2 - 18 contracts per trade = $264,931
Same period, size based on value capped at 50 contracts = $334,362

Only a 26% difference (still, that's $69,431).

OK, I could use an extra $70K anytime BUT is it worth it in the end?

Consider that execution is the key in getting into and out of trades with more profits. Today, and yesterday, I managed to get into all of the trades at the suggested prices or better, I am fast and my platform is fast. Stopping to change the quantity before hitting the order button can make the difference in missing an entry or taking a lower bid to get out, this is daytrading afterall. A few pennies here and there don't sound like much but if I made and average of 2 cents more over all my trading (easily possible) it adds up to $18,364 over the five quarter sample.

Take that one step farther again and consider that I may miss, on average, 1 in 10 trades due to that delay (it has happened often enough already) and I may get on average 2 cents less per trade overall. That would be a $20,460 missed profits and $18,264 in lower profits or $38,724 overall.

Basically it starts getting to the point of splitting hairs. If I were trading based on value all the time I would be quick enough on the buttons that it would be less and less of a factor over time. As it is, I am satisfied with my current performance numbers. The value trading over quantity trading makes more of a difference on the lower account size and that is changing every day. I also am increasing the trade sizes regular enough that the previous comparison would be much more complicated to set up as I grow in trade size more often than quarterly. This may have skewed the results in favour of value sizing over same sizing so I will consider perhaps using some wider sizing guides to have a few different sizes based on a price range, less thinking or referring. 5 might be the default and 3,4,6,7 might be the slight adjustment factor if the price is much higher or lower than the $2.68 average.

Jeff.

Trading sizing...beating a dead horse?

Position sizing seems to take up most of my thoughts about trading of late. Likely this is due to the potential profits related to larger position sizing, it is tempting to just bump them up across the board.

Seeing as I have three active plans going right now it makes the most sense to split the trading capital up to allow for each to had at least minimum workable trade sizes.

Day trading: This is fixed due to the TFSA account being funded to the current maximum allowed under the CRA rules. Due to loses from last year I was down over $3,000. Add the allowable contribution room for this year of $5,000 and I started out at $6,700... or so. I am now up to $9,500 so running three contract trades allows 12 concurrent trades based on my current $2.62 per contract average price so far. Most days I will not see that many trades but it allows for carrying some overnight and holding the next day. It also keeps losers to a smaller percentage of the account as I cannot add to this account until January.

I will bump up to 4 contracts once I hit the 15 concurrent trade level, near $12,000 account size. This allows 11 trades at 4 contracts...anything over ten is good.

Momentum options: I feel that at least 15 possible concurrent trades should be the minimum here. Given the average prices are $2.05 that should mean $615 trades. That is probably low as there were some trades that I missed that were higher priced... so I'll use the same $2.62 as in the day trading. Trade sizes are $786. 15 trades would use up about $12,000.

Stock trades: Seeing as I can use margin here I can triple the account size to determine my trading sizes. This is also the least profitable plan as it, so far, involves only trading long the stocks themselves. Prices vary greatly but I wanted to use 100 shares as a minimum position size. The most expensive stock so far has been in the $40 range. If I subtract the cash allowance for the momentum options trades ($12,000) that leaves about $10,000 cash for stocks, or $30,000 margin. Using the average price of all stock trades thus far ($17 approximately) I could place 17 x 100 share trades altogether. I figure that some of the less than $10 stocks could use 200 shares and some of the $30 plus stocks might be OK with 50 shares.

Using a 15% stop loss on these stock trades leaves me with an average per trade loss allowance of $255. Seeing as I move these stops with the prices as they rise (which worked in my favour last week) I can easily accommodate this even considering the margin applied.

Enough weekend ramblings for now.

I am looking forward to some more profitable trading this week and I plan on seeing 4 contract day trades into the following week. I think that I will leave the maximum at 5 once I get there only to manage possible losses over the long run. Get the account growing, keep the cashflow at a nice consistent level then consider when to move to 6 or more contracts afterwards.

Jeff.