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 Post subject: Meaningful Position Sizing and reducing risk
 Post Posted: Wed Dec 29, 2010 12:26 am 

Joined: Fri Nov 05, 2010 8:31 am
Posts: 72
Since this thread has been ignored for such a long time , I thought I would start a discussion going on what is a very important part of SB:
I happened to look at the trades that you have made for the first time over the long break.
One thing I noticed immediately is that you have taken out a £1 a point bet on every share.
I had a discussion on Tony Loton’s blog about this some time ago, because I think doing this is wasting opportunities and also increasing risks unecessarily , I thought other’s might want to express an opinion
I will explain
first the wasted opportunities::
If a stock has a very low price the total exposure is very small. This means that for a stock such as YELL current price about 12p you have a total exposure to Yell of £12 in total. If it goes bust you lose £12, however your stop loss at 7 would probably catch it so you would only lose £5. Note your stop loss is set to trigger at a 42% drop!! However this also means that if the stock price goes up 50%, you stand to win £6. In order to win £50 the stock price has to go up 5 fold approximately, very unlikely!
Compare that to Domino Pizza current price 550 ( I know you don’t have a position in this anymore but you did at one point) , at £1 you have a total exposure to Pizzas ( well Domino’s at least!!) of £550. If you set a sensible stop at 2* AVTR (currently about 16) you are risking a total of £32, however if the price goes up only 10% ( reasonably likely) you have won £55.
It seems to me that a £1 a point bet on Yell is a meaningless bet, there is very little chance that your stop loss is going to be hit and even less chance that you ever make any sensible money out it.
The way I deal with this is to always think about what the value of the total exposure that my bet is giving me. I am usually aiming for a value somewhere between £200 and £1000 depending on various things. Thus on Yell I might start with a £20 a point bet, this is equivalent of buying £240 worth shares. If I pyramid up it would probably be in extra £10 a time.
While with a share like Domino’s I might start at 50p a point this is equivalent of buying £275 worth of shares.
The Yell shares have gone up 23% since your trade on 12/11/2010, you have made the grand sum of £2.3, if you had gone in with a £10 a point bet, put a stop loss at 10% below, you would have risked £10 and be up £23 now!! I think that was a wasted opportunity.
Secondly the increased risk.
Risk is made up of two parts, one is how much you lose if an event occurs and secondly the probability that an event occurs.
Let’s take a fairly unlikely risk, i.e. a company goes bust overnight. Let us assume that all the companies that you have a bet on have an equal chance of going bust overnight. (I know this isn’t true, but it is difficult to work out what the chance is and for this exercise it doesn’t actually matter, it could be just some bad news).
As we have established already your risk with Yell is only £12 really not worth worrying about, however the Domino risk was £550 much higher, if that was the company that went bust it is much worse. Another company you had a bet on was Persimmon at 414p , this would have given you a risk of £414. Most of your other bets were on companies with much lower prices so the exposure is much lower. The point about this can be seen in the following example: if you have 20 bets active, say two bets on companies with prices at 500 p giving an exposure of £1000 in two companies, and 18 bets on companies with prices at 20p giving £360 exposure in the rest. Total exposure of £1360, yet 1000/1360 i.e. 73% of your exposure is in just two companies. This to me is an unnecessary risk because it is easily avoided.
" Off the lip"

 Post subject: Re: Meaningful Position Sizing and reducing risk
 Post Posted: Wed Dec 29, 2010 2:46 pm 

Joined: Fri Nov 19, 2010 7:24 pm
Posts: 91
'OTL', hope you had a good Christmas.
Excellent post, I'm going to re-read it when I finish work later but I think you've made some great points using good examples.
I've been guilty of doing the same £1 per point default bet, and only recently changed my thinking towards it pretty much for the same reason as your Yell example. Just not enough upside to small value shares.
Good stuff.

Spread Betting Trader

 Post subject: Re: Meaningful Position Sizing and reducing risk
 Post Posted: Fri Dec 31, 2010 2:58 pm 
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Joined: Wed Nov 03, 2010 9:10 pm
Posts: 147
I finally got some time to take a look at this in more detail and absorb what you have said.

It all makes perfect sense. I guess there are a few reasons(Excuses) why I have been only betting £1 per point and I'll try and explain them.

Firstly, all the current spread betting accounts I have only allow a £1 per point minimum bet size. This is something that I have mentioned before, in a previous forum topic I think. In the new year I will be looking to open a new spread betting account with a company that offers fractional bets. This should allow me to take on more trades according to my strategy.

Secondly, My current account size is quite small. Having lost a reasonable sum of money at the beginning of this year I guess I may be a little afraid of going higher than £1 per point. This is obviously something I need to work on as Scared money never wins.

I could go on but I'm basically creating excuses for why I do this. The real reason is I've never really considered what you have just pointed out to me.

I think in the next few weeks I'll be giving this more though that's for sure.

Thanks for taking the time to point this out. It's an excellent post and certainly has got me thinking. This was the main reason for creating the site and the forum so we can all learn from each other. At the moment it would seem that offthelip is the head teacher, thanks again and keep up the good work. Hopefully someday I will be able to pass on I've learned from you to others.

May the markets be with you!

The Spread betting beginner

 Post subject: Re: Meaningful Position Sizing and reducing risk
 Post Posted: Fri Dec 31, 2010 3:52 pm 

Joined: Fri Nov 05, 2010 8:31 am
Posts: 72
Thank you for your kind words, but I hate to be thought of as the Head Teacher because I am relatively new to this as well and I am struggling to make a profit at SB.
I think we learn by questioning our own ideas. One of the ways of doing that is to clarify them by writing them down and then publishing them on a forum like this, the subsequent comments can be very informative and can stimulate new ideas.
Your idea that we can all learn from each other I think that is the right approach, I have learnt about things from reading your blog, and it has certainly stimulated ideas. So well done.

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