Variable position size after entry

A second rule set after entry

This archive article compares two post-entry sizing philosophies. One path reduces size after a favorable move. The other adds size after a favorable move. The question is which path is better on a risk-adjusted basis.

variable-position-size changes how many units are held after entry, while keeping the same entry and exit prices as a constant-position-size version of the system. constant-position-size holds the same number of units from entry to exit. Only the number of contracts held during the trade is allowed to differ.

The channel-breakout-system

The test vehicle is a channel-breakout-system, an always-or-flat breakout procedure that enters on a longer lookback extreme and exits on a shorter opposite extreme. Here that is a two-lookback channel breakout that enters on a 50-day extreme, exits on a 20-day opposite extreme, and stays flat until the next entry.

Units, not raw contracts

Constant-size exposure is defined in units, not raw contracts. A unit is a volatility-scaled parcel of contracts chosen so that markets with different multipliers and ranges receive comparable exposure. Contracts equal a trader-chosen constant divided by the product of the contract multiplier and the 20-day average true range at entry.

The baseline is one unit per market, with the sizing constant set to 1500, across a 25-market US futures book and two five-year windows, 1985-89 and 1990-94.

Standardized-price and the vps-profile

Variable size is applied on a standardized-price scale. standardized-price is price progress from entry, measured in units of the entry-time 20-day average true range, and signed so that favorable movement is positive. That quantity is favorable distance from entry divided by the entry-time 20-day average true range.

The vps-profile maps standardized-price highs to the number of units held. Units may change only when standardized-price makes a new favorable high. Size is frozen during retracements so the size path stays tractable. umax is the largest number of units the variable-size path is allowed to hold on one trade.

A worked size path starts at one unit, adds at standardized-price highs of 1 and 3, and later reduces size at still-higher standardized-price levels.

Risk as a rare downside loss

Risk is defined as a Monte Carlo estimate of a rare downside loss before a profit goal, not as a volatility statistic that also penalizes upside equity jumps. A return-risk-ratio, annual profit divided by a downside-loss amount estimated from the trade stream, is used to compare sizing methods.

A later walk-forward illustration

A later real-world walk-forward illustration compares the same breakout entries under variable and constant sizing. It reports a higher annualized return and a slightly smaller maximum open-equity drawdown for the variable path in 1990-94.

Editorial note: those archive-period figures are not a claim about present-day results.