Position Sizing Algorithm Portal

Here is your  portal containing FX Renew’s custom position sizing algorithms. More algorithms will be released over time.

Scroll down to access your position sizing algorithms…

Scale-in Advanced Position Sizing Model

The scale-in advanced position sizing model is used to capture long-term trends. The first part of the model uses R-multiples, portfolio heat and maximum leverage.  

Part two of the model allows for some profit taking to take place when the market is overbought or oversold.

Part three of the model is an optional component that uses “markets money” to increase trade sizes during a trend. 

Let’s start with the first part of the model. 

Part 1: Scale-in

The initial risk on the trade will be 1R. For long-term trades, this could be 2% of the account. 

At future scale-in points, an additional 1R risk is added. In this model, you will scale-in three times. The maximum risk on a position would be 3R. 

At each scale-in point, the stop can be trailed to limit losses. This reduces the risk on the earlier positions to less than 1R and will eventually reduce the risk on the trade to zero, once the trailing stop has been raised beyond the entry points. 

Portfolio heat

Portfolio heat is the maximum risk allowed on the portfolio at any one time. It is recommended that the portfolio heat is never more than 20% for long-term trading. For short-term trading, it should be much less. 

In this model, you scale-in only while there is risk “available”. For example, if you are risking 2% per trade, then you would have at most 10 trades. If the trades move in your favor then risk is reduced due to a trailing stop. In this circumstance, more positions can be added. 

Maximum Leverage 

To further control risk, there should be no more than 10:1 leverage used on the account. For example, if you have $100,000 in your trading account, then you can take no more than $1 million in positions. In part three of the model, you can allow for a maximum of 20:1 leverage to be used. 

Part 2: Trade around the position

Often, during a long-term trend, the market will end up overbought or oversold. These can be opportunistic times to take some profit. 

In this model, we allow for up to 40% of the trade to be closed during these circumstances. The amount you take off can then be added back on at new scale-in points. 

You will want to keep the majority of your position on, just in case the market does not give you an opportunity to scale-in again. This is why we only take off a portion and why we look to add it back on again. 

Optional Part 3: Market’s Money 

When you are doing well for the year, it can make sense to go for a really big win. Stanley Druickenmiller attests that the way to generate superior long-term returns is to have a few 100% years. 

Once you are up 30% for the year, then part 3 of this model allows you to be more aggressive during your profitable trades. 

You scale-in and trade around the position as normal. The difference is you increase the size of each position as you scale in. The goal is to always maintain the full 3R risk. 

If your trailing stop has moved and locked in 1R profit, then the next time you scale in, you would add not only the new 1R risk but an additional 1R risk. This is the same when you are trading around the position. If you take profit and lock in 1R, then you would add an extra 1R risk, next time you scale-in. 

This position sizing approach is to be followed during the first 50% of the expected move. You don’t want to add significantly to your position in the last half of the trend.