Wednesday, 23 June 2010

Risk Tolerance, Position Sizing and Scaling

I get a lot of emails about stop losses. My standard reply is that I do not exit on stops although I ALWAYS have a drop dead stop in the market far away from my position. I tell you all, that I let the market tell me when to get out.

What we have not discussed in depth is the concepts of risk management, position sizing and scaling in. These concepts are harder to discuss in writing as I am anxious to be clearly understood.

There are some basic concepts I adhere to. I will not risk more than a fixed percentage of my account on any one trade. Traders find it hard to adjust size to their stops in the heat of battle. Using range bars makes it easier because my drop dead stop is a certain number of range bars. This way, I can calculate my risk very easily and quickly.

Traders typically risk a fixed percentage that changes with their account size, adjusting daily, weekly, monthly or a different number in accordance with their trading plan. This process keeps risk constant and lets position size grow with success.

I also introduced my concept of Doubling Down in a recent post here where I spoke about averaging a trade that has gone against me without significantly increasing my risk.

This tool can be an important arsenal in your toolbox and increase profitability significantly by reducing losses. It should be used very intelligently and ONLY when the original concept for the trade is still in place OR when it is CLEAR that the market will move back in your direction albeit not to the original target.

That post mentioned above has the criteria for Doubling Down entry placement.

Today's trades were fun. The first trade was an early entry towards the gap. The area below was low value and the momentum carried price down until it found support just above the POC of 11 June. The context is everything. I have been beating the context drum since I started the blog last year and I'm glad to see that lots of people have noticed and are now spreading its importance in their own blogs.


  1. EL,

    Where were you filled on trade 2? New Home Sales came out and I have that bar lasting less than one second.


  2. Aaron, I just realised you meant the other trade. I sold it at bar close on stop against the EMA. I was filled on the next bar I think. Look at the CCIs for the clue that the up move was a pullback.

  3. EL,

    Question to Trade 1: six bars back at 7:23 - there was a similar trading signal: order flow, both CCI declining, shorter EMA turning red and above all the same context, POC of 11 June. You didn't take it, was there a specific reason.

    I suppose the text marks on your charts " Buy H1" and " Sell S1" are automatically generated signals.


  4. Dave, I think I was trading the Euro (6E). Yes, the markers are auto generated as alerts, not trades. I then look at context etc

  5. Hi EL,

    As you noted in an early post, you want both CCIs to have the same slope. Do you look for other patterns in the CCIs? What do you think about using the difference between both CCIs as an additional hint?

    Thanks and best regards,

  6. Samer, I don't look for the same slope. The CCI is a momentum indicator. There is a short term one and a longer term one on my chart. I look at the momentum information they give. I don't trade indicators but use what they tell me. I look at what price is doing.

  7. Hi EL,

    just a question reg VB or Volume Delta...i came accross a study in Sierra Chart they call "Cumulative AskVol/BidVol Difference", i guess, this comes near CVB basically (as i got it, VB is NOT "uptick/downtick" volume delta) ?