Stop-loss calculation of leveraged positions GDX Robot

[pdp-brugge]

Pascal,

The stop-loss for a new position in GDX is 7.10%
The stop-loss for a new leveraged positions is 14.24% (NUGT) or 13.75% (DUST)
Shouldn't the stop-loss for these leveraged positions be 3 times the stop-loss of the 1x position?

PdP

[Harry]

While the above may be true, I believe Pascal and Billy have indicated numerous times that conditional buy & sell orders (using GDX price as the trigger) should be utilized to trade leveraged instruments.

Those numbers are only to give a sense of where you might get stopped out, but really should not be used to trade the Robot.

[Billy]

I think we need to check if the fact that NUGT/DUST used to be 2x leveraged and switched recently to 3x leveraged requires some coding adjustments for the automatic stop settings.
Billy

[Pascal]

I think we need to check if the fact that NUGT/DUST used to be 2x leveraged and switched recently to 3x leveraged requires some coding adjustments for the automatic stop settings.
Billy

Indeed. The stop loss is calculated using the 2X leveraged of some weeks ago, while these ETFs have now become three time leveraged. I'll change the code.

Anyway, if you use these three times leveraged, you need to have a much tighter stop management policy than what is announced on the Robot pages.

Furthermore, we once again want to stress that we do not advise to enter leveraged positions and I myself seldom do that. For example, the IWM trade is now entered (By me) using a twice leveraged ETF (TWM) and not TZA.
I do that because I know my personality as a trader.



Pascal

[pdp-brugge]

Pascal,

I agree that triple leveraged security's have much more risk.
Therefor I do my homework and set my position size for a GDX trade (Short or Long) with a maximum risk of 1%.
Before I can calculate the position size, I must determine the maximum risk being the difference between entry and stop-loss.
This morning I made the calculation and saw that the stop-loss for a triple leveraged position was only double of that of a single position.
I have done back-testing with the EOD GDX MF signals and using proper position sizing the return is much higher with DUST/NUGT than with GDX with still an acceptable draw-down (acceptable to me).
Getting the signals right is one thing, the second (and perhaps even more important) parameter is the use of proper position sizing.
Lessons that I have learned the hard way...

PdP

[yakovcohen45]

Pdp,

What do you mean "Limiting the risk by 1%" ?

Yakov.

[pdp-brugge]

Yakov,

For every trade I make using the GDX MF model, I take a maximum risk of 1% of my equity.
I calculate the difference between entry and stop-loss and this number I use to divide 1% of my equity.
This gives my the quantity of shares that I can buy.
Worst case (if the stop-loss is hit) my loss is then 1% of my equity per trade.

PdP

[Rembert]

Indeed position sizing is often overlooked by new traders. I posted this link before but here it is again :
http://www.iitm.com/sm-position-sizing.htm

[pdp-brugge]

I got my mosterd from Van Tharp and of course from Dr. Elder

[grems8544]

I think Van Tharp's analysis of position sizing is the best treatment that I've seen anywhere in the investment/trading world. I generally follow his methodology with the GDX and IWM trades.

So let me give an example of my latest GDX trade:

One of my accounts is $47,734 in size.
2% of this is $955 -- my maximum risk per position for this account.
GDX entry for me was at $47.11 -- I bought about 5 minutes before the open using a limit order.
The recommended Stop Loss for GDX was -6.38%, which is $44.10
$955 / 0.0638 = $14,968 position size
$14,968 / $47.11 = 317 shares

The position is up $375 as I write, or in Van Tharp's parlance, 375/955 -->.39"R", which is his method of quantifying amount risked to amount won.

Hopefully this helps.

Regards,

pgd

[Rembert]

I do the same, not only for robot but also my disc trades.

R is indeed an excellent measure for the quality of a trade. It doesn't mean very much if one says I made x amount of $ or % on a trade. Risking $1000 to make $100 is an example of a bad trade even if it made a profit.

[ilonaross]

I think Van Tharp's analysis of position sizing is the best treatment that I've seen anywhere in the investment/trading world. I generally follow his methodology with the GDX and IWM trades.

So let me give an example of my latest GDX trade:

One of my accounts is $47,734 in size.
2% of this is $955 -- my maximum risk per position for this account.
GDX entry for me was at $47.11 -- I bought about 5 minutes before the open using a limit order.
The recommended Stop Loss for GDX was -6.38%, which is $44.10
$955 / 0.0638 = $14,968 position size
$14,968 / $47.11 = 317 shares

The position is up $375 as I write, or in Van Tharp's parlance, 375/955 -->.39"R", which is his method of quantifying amount risked to amount won.

Hopefully this helps.

Regards,

pgd

Thank you so much for posting such a clear example. This is the first time I've seen an immediately usable, sensible formula, and I didn't have to wade through reams of blah blah blah to get to the point. I'm incorporating this as of today.

Thanks!!!