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Position Sizing, Stops and Targets

Position sizing allows you to control the size of the strategy portfolio and the trades within it. Trading stops and targets can also be specified which will be applied in addition to your trade criteria.

See the backtesting help guide for more general information about strategy backtesting.

Starting Equity

Enter an appropriate starting equity for your test taking into account your position sizing and maximum position choices.

Position Sizing

Calculation of Position Sizes

Various position sizing algorithms are available:

  • Fixed number of shares - means that all trades are entered with the same number of shares regardless of the price or volatility of the stock
  • Fixed cash amount - means that all trades have the same cash value, so high-priced stocks will have a smaller number of shares than low-priced stocks
  • Fixed percentage of Starting Equity - is similar to Fixed cash amount, except that the amount is a specified percentage of starting equity
  • Fixed percentage of Current Equity - allows you to vary the cash amount of each trade depending on the performance of the portfolio. In other words increase cash amounts when the portfolio produces profits, and decrease when losses occur 
  • % of Current Equity to risk - allows you to control position sizes depending on the performance of the portfolio and the volatility of each stock. See the % of Current Equity section below for an example.

Maximum Positions

Enter the maximum number of open positions at any one time and the maximum number of new positions that can be created on any one day.

Position Rounding

Certain position sizing choices may result in part quantities. Choose how you wish to round the positions.

Stops and Targets

Trading stops and targets are optional and can be percentage or average true range based.

Percentage Stops

Enter appropriate percent figures for your stops and targets. For example, a Stop Loss of 5 will mean that trades are closed when the price has moved 5 or more % against the trade.

Average True Range Stops

Average True Range (ATR) stops and targets take into account the volatility of each stock. For example, a Stop Loss of 3 ATRs may result in an equivalent percent stop of 5% for a volatile stock but a percent stop of 10% for a blue-chip stock.

If you set ATR stops, the period for the average true range calculation is also required.

Time Stop

A Time Stop simply closes any position, which has not been closed by other stops or close criteria, after a set number of days.

Exit Price

When a stop is hit you can choose to exit trades at the calculated stop price, the close price for the day when the stop is hit, or the open price on the day after.

% of Current Equity to Risk

This position sizing choice allows you to control position sizes depending on the performance of the portfolio and the volatility of each stock.

For example, you may choose to risk 2% of current equity on each trade with a stop loss of 3 ATRs.

Example 1

If the Current Equity is 100,000 then the amount to be risked is 2,000. In other words, the stop should be hit if you lose 2,000 or more on the trade. If the stock has a current ATR of 0.50 you calculate the number of shares to trade as follows:

Shares = 2,000 / (3 * 0.50) = 1,333.33 = 1,330 (rounded to nearest 10)

Working backwards, if the stop of 3 * 0.50 is hit then a loss of 1,995 will result. (Slightly different from 2,000 due to the share rounding.)

Example 2

This second example also risks 2% of current equity with a stop loss of 3 ATRs.

If the Current Equity is 120,000 then the amount to be risked is 2,400. If the stock has a current ATR of 1.20 then the number of shares is calculated as follows:

Shares = 2,400 / (3 * 1.20) = 666.67 = 660 (rounded to nearest 10).

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