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Position sizing and Portfolio Management

7 Sep 2016 ‚óŹ 04:56 AM

In the Long Short Portfolio PMS that we manage, and I am directly overlooking since June 2016 of this year after a 4 year break, we drew down 2-3% in the last 2 months. August stops were hit and the Nifty is flirting with 9000. Remember we use Position sizing very proactively and have also taken Long/Short combined trades recently, something I do not usually do as stocks are both going up and down at the same time. So we have open shorts in weak sectors like IT and PSU banks when possible and Long positions in the Value wave stocks like HPCL, JET, and trades like South Indian bank and HLL. This is what we do so the net Position is Long and hedged with weak sector bets. 

Once in a While I get a letter on what is Position sizing. The reason I developed the Position sizing model was that when I last managed this Portfolio up to 2011 I used to go all Long or short on stocks when my market view would change. The result was a volatile portfolio that saw a drawdown of 30% twice and also a return of 90% at one point in 2009. So a risk reward of 1:3 but big absolute numbers that not all are comfortable with. The Position sizing Model reflects a handful of technical indicators and their individual Buy/Sell signal on the daily and weekly time horizons. Each reading is given the same weightage. So a close above 20dma would have the same weightage as a close below the 40wema. A reading of ''40% Long'' means that 40% of the technical readings were giving bullish readings and 60% bearish. This allows us to be Long up to 40% based on risk. So if I am bearish on the market and the Position sizing is ''20% Short'' I would have to not be short more than 20% of the Portfolio. This reduces the drawdown risk while maximising gains when a trend develops. When a trend develops and you start to make money on the Portfolio you can always add to your position.

The Direct impact of this process is that you are not buying the dip or selling but rise but the exact opposite. You will be buying the rise and selling the dip more as it trends. In other words in effect you are trend following. The Elliott wave view only gives you the directional bias but Position sizing and Trade Management are what you need for effective Poftfolio Management and execution of your view. The two are different processes. One that takes a contrarian view of the markets and the other that involves Trend following.

The Position sizing video below is a 30 minutes Tutorial on building your own Position sizing system using 3-5 indicators to reduce risk or loss and maximise gains during a trend. This also helps us manage time, beucause not all views play out in an expected or anticipated time frame and time can catch us off guard with many volatile swings in between.

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