academy of financial trading€¦ · some things you need to know: 1. how much money you have in...

ACADEMY OF

FINANCIAL TRADING NOTES

[Ulitmate Traders Programme – Position sizing]

(Lessons 1 & 2)

1

Contents Legal ........................................................................................................................................... 1

Position Sizing ............................................................................................................................ 2

RV - Technical Analysis RV ..................................................................................................... 3

RV in Mathematical Terms – Individual Exposure ............................................................... 16

Position Sizing Example.................................................................................................... 16

Position Sizing Steps......................................................................................................... 17

Examples of Trade Sizing Across a Variety of Instruments .............................................. 18

Legal Any information or opinions provided by the Academy of Financial Trading is General Information Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By viewing any material provided by the Academy of Financial Trading Education Limited or using the information you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here by The Academy of Financial Trading Education Limited, it's employees, directors or fellow members. Futures, Contacts for Difference (CFDs), Options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in CFDs and leveraged forex markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material provided by the Academy of Financial Trading Education Limited. Students of the Academy of Financial Trading Education Limited are responsible for their own accounts, trading account and their own trades. The Academy of Financial Trading Education Limited is not responsible for any financial loss suffered by any student from leveraged Trading or any other financial investment. The Academy of Financial Trading Education Limited does not give investment advice and any opinions expressed or discussions that take place in the Academy cannot be deemed to be investment advice. Your financial trading account, trades carried out on your account and funds held in your account are a matter between you and your financial trading account provider. Any issues in these areas are between you and your trading platform provider and are not the responsibility of the Academy of Financial Trading Education Limited. The past performance of any trading system or methodology is not necessarily indicative of future results.

2

Position Sizing

This area is fundamental to our trading style

Here we will cover exactly how much to trade each time based on your account size and the market volatility

This will reduce overall risk and adjust positions based on what’s happening right now

This will help avoid the volatility which kills retail trades each day

RV – Risk relative to Return

Two definitions combined

RV = 1% of your account

RV= 2x15 ATR RV in Mathematical Terms

Right now let us assume RV stands for one percent of your account

RV = 1% of your account i.e. 100k = 1k, 20k = 200

RV will change as your account fluctuates so you will need to adjust over time

Our Trade Sizer Tool will do much of this for you however it is important to know where it comes from

RV in Technical Analysis

RV= 2*15 day ATR of the market

Daily range is high to low i.e. take high price from low price and that’s your daily range

15 day ATR is just all 15 values averaged

True Range element simply means it is from High to Low for each day with any overnight gaps

3

RV - Technical Analysis RV Gold 1D

4

Gold 1D with 15ATR - app22 [RV = app 44]

5

GBPUSD – cable – 1D 15ATR – 103pips [RV 206pips]

6

AUDUSD 1D 15 ATR – 99pips [RV = 198]

7

Dax30 1D 15 ATR – 109.7 [RV 219.4]

8

S&P500 1D 15ATR – 13.1 [RV 26.1]

9

Groupon 1D 15 ATR – 1.6 [Gaps included in average] [RV 3.2]

10

Boeing 1D 15ATR – 1.0193 [Gaps and flat ATR during consolidation – outside order flow] [RV 2.0386]

11

Cotton No. 2 1D 15 ATR – 2.1333 [sideways and exceptionally low ATR level] [RV 4.2666]

12

Sugar No.11 – 1D 15ATR – 0.5140 [RV 1.028]

13

CAC40 1D 15ATR – 51.33 [RV 102.66]

14

DAX30 1D 15ATR – 109.7 [note similarities to CAC40 due to commonality of markets] [RV 219.4]

15

Some things you need to know:

1. How much money you have in your account 2. Know or set your tick size. If trading futures you will need to know what is the value of a tick

in the market you want to trade (all different). If CFD’s you will need to choose your position size based on the stops size – our Trade Sizer will do this for you as you will see shortly

3. You need to know the current volatility 4. Volatility is measured by the 15ATR 5. It’s the 15 day period we use as through back testing and real market conditions that is what

has performed the best. The exact number, to a degree, is not the significant point. The consistency in application is what is most important.

6. If you don’t know the conceivable movement in a market you are trading how could you possibly know where to put your stop?

7. This is a technique we have developed to stop you as the retail trader being taken out by the volatility which is specifically aimed at you

8. When markets begin to trend the ATR usually increases 9. When markets are sideways bound the ATR remains flat usually1 10. If daily range is larger you should adjust your position sizing down to fit the volatility.

Amount you trade should be correlated to the volatility of the market and other markets to balance your portfolio

RV Combined represents two things

1% of your account size

And the average daily volatility x 2 i.e. TWO average daily range movement in the market

These two definitions are key

1We do not use point 8 or 9 above in relation to low or high ATR readings as an indication to trade specifically

16

RV in Mathematical Terms – Individual Exposure We have developed a tool to streamline this process which is extremely helpful Usually only needs updating once a week to determine position size

I.e. when putting on a new trade we select our position size based on the new RV

This is only done once a trading opportunity is discovered as it would be futile to continuously calculate unless an entry was immanent

RVs primarily role is to equate or normalise your position sizes across different markets

Regardless of what trading

Result is if two average daily movement either for or against in a market will make or cost you 1% of your bankroll per instrument i.e. normalised

Position Sizing Example Assume EURUSD is 1ATR = 100pips Remember for RV we use 2*1ATR, there RV = 200pips in this example What is your trade size? Note: Always turn your financial risk in account currency base into Quote Currency/Second part of FX pair/unit of measurement for instrument i.e. Gold USD, DAX euro.2 Pip value (PV) = Trade size(T) x pip location(PL) i.e. PV = T x PL T=PV/PL T= 0.6569/0.0001=6,569 [see below for workings of 0.6569] mt4=0.06569 so must round and would normally round down so 0.06lots [i.e. 6,569/100,000 contract size][also note rounded down] Note: pip location depends on the instrument e.g. EUR/USD is .0001, USD/JPY is .01 etc... Also be aware of platforms using fractional pips. So for example on Ava MT4 EUR/USD shows as .00001 as it uses 1/10 fractional pips hence the extra decimal place.

2 If you had a Euro account and wished to trade EURUSD then you would convert your risk in Euro into USD [by using EURUSD from chart]. If you had a Euro account and wished to trade EURGPB then you would convert Euro into GBP [by using EURGBP from chart]. If you had a Euro account and wished to trade Gold you would again use the EURUSD rate as Gold is traded in USD. If you wished to trade Dax30 then you would use the number ‘1’ because the Dax30 is traded in Euro and your account is based in Euro.

17

Where did we get this 0.6569 from? Well we were willing to rick €100 We converted our €100 to USD as that is the quote currency. The rate at the time of writing was 1.3138. This gave us $131.38. We then divided that sum of our total accepted financial exposure by the number of pips we wished to risk, to find the value of risk per pip i.e. our desired pip value $131.38/200 = $0.6569 This then gives us our Pip Value/PV We then input our PV into our Trade Size Formula/T

Position Sizing Steps

Convert Pre-Accepted Financial Risk to Quote Currency3

Divide Quoted Financial Risk by number of pips in RV which is 2*15ATR

We get PV

Input PV in T formula below

T =PV/PL The result is that you trade with the same financial exposure each time across all instruments and markets Hence RV balances our portfolio Remember if you don’t know your pip size or calculate them each time it is like going to a casino, giving them €50,000 and receiving stacks with various coloured chips and you start betting without out knowing what the value of each chip is. This is something we can all agree would be just insane. However most people do not professionally select their position sizes and don’t limit their exposure based on volatility. This one technique will adjust your trading incredibly. The good news is whilst it is important to know this formula and how it works; we have done the hard work and created tools for you to use to select your position sizes.

3 This is extremely important. Use your account currency as the first part of this fx part and the second part of an fx pair you wish to trade. Where trading other instruments use your account currency base as first part of this fx pair and currency of measurement as the second. See footnote 15 also.

18

Examples of Trade Sizing Across a Variety of Instruments Each of these examples will use RV (1% risk/2*ATR)

An Interest Rate Product i.e. bonds

A food product i.e. commodity/sugar

An energy product i.e. oil

A currency i.e. yen Interest Rate – Eurobund - German futures for long term debt

19

Eurobund RV 1D 2*15ATR [chart with ATR above]

Assume you had a €10,000 account how many should you trade?

You cannot answer unless we know the volatility, from the below chart we see it

15ATR = 0.9527

This tells us the Eurobund has been moving on average 0.9527 in value per day relative to its current price below at 138.23

Our pip location/increment of movement is 0.01 [remember you get this from your broker – we can help too]

We multiply our ATR by two to achieve RV

0.9527*2 = 1.9054

So we convert our 1.9054 into pips by dividing it by 0.01 = 190.54

So now we know RV = 2*15 ATR = 190.54 pips

RV = €100 [10,000 at 1%]

Convert to currency of instrument [here we do not need to do anything as the account is euro and Eurobund is in Euro]

RV = €100

We then divide our monetary exposure by the pip distance for our stop to give is our pip value

Pip Value = 100/190.54= 0.524824

Trade size = Pip Value/Pip Location

T = 0.5248/0.01 = 52.4824

So we need to buy 52.4824 unit of Eurobund to have a 190.54 pip stop with €100 exposure

In order to place your trade you will need to know what one lot is set at in units traded

For Eurobund with AVAFX using MT4 it is 1,000

We divide the 52.4824 unit by 1000 to get the input required for MT4

52.4824/1000 = 0. 524824

We must then round this to the second decimal place

Trade Size = 0.05 in MT4

Thankfully we have our Trade Sizer for speed…

20

Sugar RV

Position sizing steps Sugar No.11 RV 1D 2*15ATR



15ATR = 0.4873

We multiply our ATR by two to achieve RV

2*15ATR = 0.9746

This tells us Sugar has been moving on average 0.9746 in value per day relative to its current price below at 24.63

Our pip location/increment of movement is 0.01 So we convert our 0.9746 into pips by dividing it by 0.01 = 97.46

21


RV = €100 [10,000 at 1%]

Convert to currency of instrument [Sugar No.11 is measured in USD]

RV = €100*1.3138 = $138.38


Pip Value = 131.38/97.46= 1.34804022


T = 1.348/0.01 = 134.804022

So we need to buy 134.8 unit of Sugar No.11 to have a 97.46 pip stop with $131.38/€100 exposure


For Sugar No.11 with AVAFX using MT4 it is 10,000

We divide the 134.8 unit by 10,000 to get the input required for MT4

134.8/10,000 = 0.01348



If your broker shows actual trade size as opposed to lots you would need to input 1 or 2 depending on your rounding style, preferably 1 [this is because the minimum trade step is 100 i.e. the smallest amount one can trade. This may vary from broker to broker]


22

Crude Oil RV 1D 2*15ATR



15ATR

RV = 2*ATR = 3.284

This tells us Crude has been moving on average $3.284 in value per day relative to its current price below at $105.25

Our pip location/increment of movement is 0.01 So we convert our 3.284 into pips by dividing it by 0.01 = 328.4


RV = €100 [10,000 at 1%]

Convert to currency of instrument [Crude is measured in USD]

RV = €100*1.3138 = $138.38


23

Pip Value = 131.38/328.4 = 0.400061 = 0.4


T = 0.4/0.01 = 0.04 = 40

So we need to buy 40 unit of Crude to have a 328.4 pip stop with $131.38/€100 exposure


For Crude with AVAFX using MT4 it is 1,000

We divide the 40.0 unit by 1,000 to get the input required for MT4

40.0/1,000 = 0.04


Thankfully we have our Trade Sizer for speed… USDJPY RV

24

USDJPY RV 1D 2*15ATR



15ATR = 0.4737

RV = 2*15ATR = 0.9474

This tells us USDJPY has been moving on average 0.9474 in value per day relative to its current price below at 79.622

Our pip location/increment of movement is 0.01 [please note you do not count fractional pips i.e. third or fifth decimal places]

So we convert our 0.9474 into pips by dividing it by 0.01 = 94.74


RV = €100 [10,000 at 1%]

Convert to currency of instrument i.e. quote i.e. jpy[need to usd EURJPY rate – 105.40]

RV = €100 = 105.4*100= $10,540


Pip Value = 10,540/94.74 = 111.2518


T = 111.2518/0.01 = 11,125.18

So we need to buy 11,125.18 unit of USDJPY which will give us pip value of 111.2518 to have a 94.74 pip stop with $131.38/€100 exposure


For USDJPY with AVAFX using MT4 it is 100,000

We divide the 11,125 unit by 100,000 to get the input required for MT4

11,125/100,000 = 0.111252 = 0.11




25

Equities We use the exact same approach for Equities. We don’t just buy 100k of each equity; you need to be concerned of the volatility This is the most important issue - to have an equally weighted portfolio Google RV 1D 2*15ATR

26


You cannot answer unless we know the volatility

15ATR = 8.0413

RV = 2*15ATR = 16.0826

This tells us Google has been moving more than $8 in value per day on average

Our pip location is 0.01, so we convert our $16.0826 into pips by dividing it by 0.01 = 1608.26


RV = €100

Convert to currency of instrument i.e. usd, fx rate 1.3138

RV = $131.38


Pip Value = 131.38/1608.26= 0.081691


T = 0.081691/0.01 = 8.1269077

So we need to buy 8.1269077 shares to have a 1608.26 pip stop with €100/$131.38 exposure

We cannot trade fractional shares so we will trade 8

If trading through MT4 you need to know what one lot is set at in number of shares

For our purposes let us assume it is 100

We divide the 8 shares by 100 to get the input required for MT4

8/100 = 0.08….

27

Apple RV 1D 2*15 ATR

28



15ATR = 9.832

RV = 2*15ATR = 19.664

This tells us Apple has been moving more than $19.664 in value per day on average

Our pip location is 0.01, so we convert our $19.664 into pips by dividing it by 0.01 = 1966.4


RV = €100

Convert to currency of instrument i.e. usd, fx rate 1.3138

RV = $131.38


Pip Value = 131.38/1966.4 =0.066812


T = 0.066812/0.01 = 6.681245

So we need to buy 6.68125 shares to have a 1966.40 pip stop with €100 exposure

We cannot trade fractional shares so we will trade 6

If trading through MT4 you need to know what one lot is set at in number of shares

For our purposes let us assume it is 100

We divide the 6 shares by 100 to get the input required for MT4

6/100 = 0.06

Thankfully we have the trade sizer for speed… Logical Conclusions The greater the volatility the less we trade as we want to ensure account preservation by limiting our downside

We focus on equalizing the risk to protect the account

We are doing all these examples to instill the confidence in you for this style of trading These are all techniques to use to balance your portfolio. We still haven’t looked at when to trade. This was just position sizing. In our next lesson we are going to look at overall exposure levels when we have multiple positions/markets.

29

THANK YOU

[email protected]

academy of financial trading€¦ · some things you need to know: 1. how much money you have in...

Documents