short-term strategies, position sizing and risk management€¦ · position sizing •the most...
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Short-Term Strategies, Position Sizing and Risk Management
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Risk Management • Source of funds
• Personal circumstances (personal debt)
• Risk tolerance and personality type
• Trading Instruments.
• Gearing, reality vs. myth
• Discipline and strategy
• Managing expectations, greed vs. fear.
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Trading Instruments
• Equities, conservative, relatively expensive.
• CFD’s and SSF’s – more aggressive and cheaper
• Currencies – very aggressive
• Options – complicated.
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Managing a Market Shift
• Volatility
• Average True Range
• A shift of fundamentals
• A shift of sentiment
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Volatility
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Volatility
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Average True Range
• A measure of volatility • Does NOT indicate anything about possible
direction • ATR reflects the degree of interest or disinterest
in a move • A bullish reversal with an increase in ATR would
show strong buying pressure and reinforce the reversal
• A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break
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Average True Range
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Average True Range
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Fundamental Shift
• Quantitative Easing 1 (QE1, December 2008 to March 2010)[edit]
• "On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage-backed securities (MBS) and agency debt.
• On December 16, the program was formally launched by the FOMC. On March 18, 2009, the FOMC announced that the program would be expanded by an additional $750 billion in purchases of agency MBS and agency debt and $300 billion in purchases of Treasury securities.
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Fundamental Shift
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Fundamental Shift
• Quantitative Easing 2 (QE2, November 2010 to June 2011,On November 3, 2010, the Fed announced that it would purchase $600 billion of longer dated treasuries, at a rate of $75 billion per month. That program, popularly known as "QE2", concluded in June 2011.
• Quantitative easing 3 (QE3),On September 13, 2012, the Federal Reserve announced a third round of quantitative easing (QE3).[7] This new round of quantitative easing provided for an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labour market improves "substantially".
• Quantitative easing 4 (QE4),The Federal Open Market Committee voted to order a fourth round of quantitative easing (QE4) on December 12, 2012. This round authorized up to $40 billion worth of agency mortgage-backed securities per month, and $45 billion worth of longer-term Treasury securities.[10]
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Fundamental Shift
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A shift in sentiment
• When there is an anticipation of shift in fundamentals, there is usually a shift in sentiment.
• Volatility and ATR are good indicators of such a shift.
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A shift in sentiment
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Position Sizing
• The most important factor in risk management.
• Too small leads to ambivalence and is not worth the effort relative to costs.
• Too large leads to anxiety and can cloud your judgment.
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Position Sizing
• Position size needs to be adjusted relative to market conditions and volatility.
• When volatility increases, position size needs to be adjusted lower.
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Position Sizing
• I start by looking at potential loss.
• Loss is based on two things:
– A technical level and
– Absolute figure relative to a/c size.
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Technical level
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Technical level
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Absolute figure relative to a/c size
– CFR gave buy signal at 4600
– Stop Loss is 4400
– Potential loss is 200
– If A/c is R100K, loss should be no more than 1.5% of total capital.
– Therefore R1500/200 = 750 shares can be bought.
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Two simple strategies
– 3 moving averages. 20,50,200
– Breakouts
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3 moving averages. 20,50,200
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Breakouts
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Questions?