Comments on: Power Ratings – Data Set #3 (Good Stuff) http://www.tasgall.com/2006/07/08/power-ratings-data-set-3-good-stuff/ Peering into the Cauldron of the Gods... Sun, 13 Jun 2010 04:13:24 -0400 http://wordpress.org/?v=2.8.4 hourly 1 By: Quicksilver http://www.tasgall.com/2006/07/08/power-ratings-data-set-3-good-stuff/comment-page-1/#comment-33 Quicksilver Sun, 09 Jul 2006 17:02:10 +0000 http://www.tasgall.com/2006/07/08/power-ratings-data-set-3-good-stuff/#comment-33 To add to the position sizing discussion, you really need a sample of past trades including commission and slippage to get an idea of what % of equity to use in deciding to trade. % of Equity is the stat to always refer to and is what Jason is saying. For any given trade, decide to risk a certain % of equity and then find out how many shares get you that % based on your stop loss. This way, things are self-adjusting. As you account grows, so will the shares you will by based on that % number. So compounding will happen naturally. But to get that % number is the rub. The best approach I've found is once you have some reliable trading record, run those numbers through a monte carlo simulator (plenty of free ones are available for Excel). This will simulate what trading might be like in the future and can give you an estimate of drawdowns. Adjust your % of equity to give you a drawdown you are comfortable with and viola. Until then though, you should trade the minimum and not worry about optimal returns. Once a record is established, a tool like Monte Carlo will help you squeeze out more returns. As to PowerRatings and the cost of them, that's a very good point. Small accounts will have a hard time overcoming the overhead. Is there any clue as to how these ratings are derived and could you simulate them for free. I mean most people pay for the luxury but with a little extra time you could save yourself the dough. To add to the position sizing discussion, you really need a sample of past trades including commission and slippage to get an idea of what % of equity to use in deciding to trade. % of Equity is the stat to always refer to and is what Jason is saying. For any given trade, decide to risk a certain % of equity and then find out how many shares get you that % based on your stop loss. This way, things are self-adjusting. As you account grows, so will the shares you will by based on that % number. So compounding will happen naturally.

But to get that % number is the rub. The best approach I’ve found is once you have some reliable trading record, run those numbers through a monte carlo simulator (plenty of free ones are available for Excel). This will simulate what trading might be like in the future and can give you an estimate of drawdowns. Adjust your % of equity to give you a drawdown you are comfortable with and viola. Until then though, you should trade the minimum and not worry about optimal returns. Once a record is established, a tool like Monte Carlo will help you squeeze out more returns.

As to PowerRatings and the cost of them, that’s a very good point. Small accounts will have a hard time overcoming the overhead. Is there any clue as to how these ratings are derived and could you simulate them for free. I mean most people pay for the luxury but with a little extra time you could save yourself the dough.

]]> By: Jason G. http://www.tasgall.com/2006/07/08/power-ratings-data-set-3-good-stuff/comment-page-1/#comment-32 Jason G. Sun, 09 Jul 2006 15:40:00 +0000 http://www.tasgall.com/2006/07/08/power-ratings-data-set-3-good-stuff/#comment-32 On point #3... I'd recommend position sizing based on the risk per trade rather than on an absolute value per trade. For example, suppose you have $50k in your account. You determine you don't want to risk more than 1% on any trade, so that is a $500 nominal amount to risk. You see a stock you want to buy at $40 and figure your stop loss is a 10% decline. Since your loss is $4 per share, you would buy up to 125 shares ($500 max loss / $4 per share potential loss). How many trades you can put on becomes a matter of arithmetic. I would probably recommend trading even smaller until you know the performance behavior of power rating stocks and your own ability to trade them profitably (What happens if you're not able to open positions at 9:30 when the signals are made? If a position goes against you, does it do it so violently that you can't maintain your stop losses and truly limit your risk?). Also, don't forget to factor in the $50/month for the service in your profitability calculations. If you have a $50k account, the $600 per year is 1.2% of your account size... if you have a $5k account you have to clear more than 12% return per year just to break even. On point #3…

I’d recommend position sizing based on the risk per trade rather than on an absolute value per trade.

For example, suppose you have $50k in your account. You determine you don’t want to risk more than 1% on any trade, so that is a $500 nominal amount to risk. You see a stock you want to buy at $40 and figure your stop loss is a 10% decline. Since your loss is $4 per share, you would buy up to 125 shares ($500 max loss / $4 per share potential loss). How many trades you can put on becomes a matter of arithmetic.

I would probably recommend trading even smaller until you know the performance behavior of power rating stocks and your own ability to trade them profitably (What happens if you’re not able to open positions at 9:30 when the signals are made? If a position goes against you, does it do it so violently that you can’t maintain your stop losses and truly limit your risk?).

Also, don’t forget to factor in the $50/month for the service in your profitability calculations. If you have a $50k account, the $600 per year is 1.2% of your account size… if you have a $5k account you have to clear more than 12% return per year just to break even.

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