Position Sizing by Van Tharp

July 10th, 2009, 10:38 PM

I am reading Tharp's book and am really interested in position sizing.
I am keenly interested in the Percent Volatility Model he presnts in his book Trade your way to financial freedom

Here is an excerpt from the book:

Quoting

MODEL 4: THE PERCENT VOLATILITY MODEL
Volatility refers to the amount of daily price movement of the underlying instrument over an arbitrary period of time. It�s a direct measurement of the price change that you are likely to be exposed to-for or against you-in any given position. If you equate the volatility of each position that you take, by making it a fixed percentage of your equity, then you are basically equalizing the possible market fluctuations of each portfolio element to which you are exposing yourself in the immediate future.

Volatility, in most cases, simply is the difference between the

high and the low of the day. If IBM varies between 141 and 143%
then its volatility is 2.5 points, However, using an average true range takes into account any gap openings. Thus, if IBM closed at

139 yesterday, but varied between 141 and 143% today, you�d need

to add in the 2 points in the gap opening to determine the true

range. Thus, today�s true ranges is between 139 and 143�&or 4%
points. This is basically Wells Wilder�s average true range calculation
as shown in the definitions~at the end of the book.
Here�s how a percent volatility calculation might~work for
position sizing. Suppose that you have $50,000 in your account and
you want to buy gold. Let�s say that gold is at $400 per ounce and
during the last 10 days the daily range is $3. We will use a IO-day
simple moving average of the average true range as our measure of
volatility. How many gold contracts can we buy?
Since the daily range is $3 and a point is worth $100 (i.e., the
contract is for 100 ounces), that gives the daily volatility a value of
$300 per gold contract. Let�s say

that we are going to allow volatility

to be a maximum of 2 percent of our equity. Two percent of

$50,000 is $1,000. If we divide our $300 per contract fluctuation into

our allowable limit of $1,000, we get 3.3 contracts. Thus, our position-

sizing model, based on volatility, would allow us to purchase

3 contracts.

What i was hoping that someone would write this up in code for the community to use in their strategies.

July 10th, 2009, 10:42 PM

Nice post. I moved to Money Management section. I will come back to this post as soon as I have some time, I am actually working on money management scenarios right now in Ninja (backtesting).

Mike

July 11th, 2009, 12:07 AM

thanks mike...I thought i posted it in the correct forum, but I guess it belongs here.

As for position sizing, it is the most important thing about makin money!

Hopefully people will share their posiion sizing algos, or if they dont have one, then lets develop one as a group.

July 11th, 2009, 12:33 AM

I've got a spreadsheet that looks at 14 day ATR, equity dedicated to a particular instrument, and instrument tick size. It then calculates your position size (# contracts) based on the time frame you are trading.

Let me clean it up and I'll post it here later today.

July 12th, 2009, 01:32 PM

Well, I spent some time trying to code up the average true range of the last three days, and then look at the range for the current day.

What I did was use the CurrentDayOHL().High and .Low dataseries and then save the previous values and average them together to get a three day average range.

Then I measured the Opening price of today vs the current price, to see how much range we've moved right "now". I also tried measuring against how much we've moved higher vs. how high we normally move to gauge the "room" left in a move, and how much we've moved lower.

I must say, I failed. The code just wasn't working. I believe it is because the strategy I am using it on is a multi-time frame strategy and also only trades certain hours of the day. Having multi-time frame made the DataSeries variables much more complex, having to rely on CurrentBar and bars.SessionBreak etc. Then having it only trade certain hours of the day further complicated things, because there were gaps in the data from the hours it wasn't trading.

So. I am hoping someone else will step up with their method.

I am using Zen Fire, so for the day range I considered using a 1440 minute bar but later changed it to 60 minute because of problems I was experiencing with CurrentDayOHL().

Maybe someone can come at this a different direction. I would like to employ these types of risk assessments in my rule book.

Mike

July 12th, 2009, 05:54 PM

I owe this thread a spreadsheet which I'll post later today. Been busy learning Ninja Script

. Also adding a Kelly formula to the spreadsheet.

FWIW I look at the ATR and put it manually into the spreadsheet every few weeks or whenever I think there has been a important change in volatility, and for the hours I trade (2am to 11:30am EST) there are two distinct ranges... volatility increases significantly at 0930am EST (duh!). I've been using a mean of my entire trading session and get stopped out more than I like during NYSE mornings.

Mike if you are calculating rolling daily ATR and trading cash hours, perhaps you need to only use futures data from cash hours for the ATR calculation? I.E. the gaps are a part of how much more "move" is left in the move. Just a thought as I work on my first coffee of the day...

July 12th, 2009, 10:39 PM

Here you go. A JPEG and a Excel spreadsheet. Top part is based on how much you are prepared to risk per trade (2% of equity in this case), what the 14 period ATR is for the timeframe you are trading, and what your stop loss point is as ATR. It looks at margin as well and gives you the lower number of the two (contracts tradeble under stop loss rules vs. margin rules).

I've added a Kelly formula underneath. Please check the math on that first!

Critique it, change it, and post it back if you find it useful.

July 13th, 2009, 12:26 AM

Thank you

Now if we can get this into Ninja Trader to auto check acct balance...

July 13th, 2009, 01:33 AM

Does your account balance change enough intraday to affect the number of contracts you can trade? Ouch!

The one thing I'm looking at is running different strats from 0200-0930 and 0930-1130 as the ATR changes from about 0.9 to about 2.0... so in theory I'm trading smaller size and with wider stops during the NYSE morning.

Otherwise that's a spreadsheet I don't need to look at too often unless there has been a significant change in my account equity or in market volatility.

July 13th, 2009, 07:46 AM

Some time ago i post some example in the NT Forum, but don't develop any further, if someone interested, we can make it here.

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Position Sizing by Van Tharp

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Position Sizing by Van Tharp