Using ATR for Position sizing and Stop Loss

[preguiiins]

Hi,
I am learning how to use this method for trend following strategy.

In order to calculate position sizing, i am using the formula:   Contracts= Risk*Equity/ATR

BTC price: 3860 €
ATR:796 €
2% Risk
10.000€ Portfolio


Scenario 1:

Contracts= 0.02*10000/796= 0.251 BTC

Scenario 2:

% dif= 796/3860= 20% or 0.2

Contracts= 0.02*10000/0.2= 1000€ in BTC

Is that Okay? Can i use both method to know my position sizing? Value of both are the same.


My big question goes when i need to calculate Stop Loss. If i am using a:

1) 1 ATR SL

0.251 BTC * 796 (ATR) = 200€.    It's ok with my risk of 2% of my bankroll.

2) 3 ATR SL

0.251 BTC * 3*796 (ATR) = 600 €.  Here i'm assuming a maximum loss of 600, it's more than my risk. 3x more.

I am struggling to understand it, but can't find how to adjust my ATR SL according my risk rate.



-When i am entering a trade, for example 1.000€, and i am doing the calculations for my next trade, i count the 1.000 placed before out of my new equity (9.000€) or i should use still the total amount of 10.000€?


Thanks in advance!

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[davis196]

From where did you get that 2% risk ratio?The risk ratio should be higher than 2% when it comes to crypto trading.
Anyway,I don't think that any formula can help with diversifying your crypto coins.
Focus more on market analysis,rather than how to split your capital between X amount of coins.

[preguiiins]

2% was only an assumption to make the calculations, still dont know which risk would fit in my trend strategy yet.

Is not for diversifiying towards crypto coins, basically is for diversifying my strategy in different trades adjusted by volatility.


Is better having a portfolio management skill rather than enter and exit strategies.

[deandree]

Instead of finding some magic formula online, get a backtest tool, try multiple options an see the statistics. For example, backtest last few months with 0.5 ATR SL, 1 ATR CL, 1.5 ATR SL etc and see that are the results. Of course, past results does not guarantee future results, but at least you will probably see some configurations that are completely useless. Much better than trying to decode some magic formula without understanding what could be real trading results with that.

[sorrysteve1]

2% was only an assumption to make the calculations, still dont know which risk would fit in my trend strategy yet.

Is not for diversifiying towards crypto coins, basically is for diversifying my strategy in different trades adjusted by volatility.


Is better having a portfolio management skill rather than enter and exit strategies.

It's my opinion that unless trading with a huge amount you don't really need to diversify too much if you're day trading. There's little wrong with going all-in as long as you have a strong stop-loss strategy that you follow at all costs.

[preguiiins]

I will not do daytrading with this approach, is for long term trends.

For me sounds better having 4 or 5 trades open with this strategy, i'm only looking for MA cross. There are lots of false breakouts, and i need at the beggining some experience catching them.

All im saying is my opinion, don't know yet how to do it accurately. Still studing a lot of stuff.

[preguiiins]

Instead of finding some magic formula online, get a backtest tool, try multiple options an see the statistics. For example, backtest last few months with 0.5 ATR SL, 1 ATR CL, 1.5 ATR SL etc and see that are the results. Of course, past results does not guarantee future results, but at least you will probably see some configurations that are completely useless. Much better than trying to decode some magic formula without understanding what could be real trading results with that.

How can i backtest a strategy? Im new on trading, all i have been doing until now is fundamental analysis and rebalancing my portfolio only.
I want to put some money apart and start learning.

Is not decoding a formula, i only wanted to learn how I adjust my Stop Loss using ATR, to understand the basics. Don't know if that formula is correct or not, just used it to see if it would stop at my risk of 2%.

[Wind_FURY]

OP, I believe to truly have a volatility-based position sizing, you should do 2% of your portfolio or €200.00, over ATR or from your calculation, €796.00, for a position size of .25125628 Bitcoins worth €969.84. The stop-loss would be -200 of €969.84, 769.84, or the price €3063.96.

[deandree]

Instead of finding some magic formula online, get a backtest tool, try multiple options an see the statistics. For example, backtest last few months with 0.5 ATR SL, 1 ATR CL, 1.5 ATR SL etc and see that are the results. Of course, past results does not guarantee future results, but at least you will probably see some configurations that are completely useless. Much better than trying to decode some magic formula without understanding what could be real trading results with that.

How can i backtest a strategy? Im new on trading, all i have been doing until now is fundamental analysis and rebalancing my portfolio only.
I want to put some money apart and start learning.

Is not decoding a formula, i only wanted to learn how I adjust my Stop Loss using ATR, to understand the basics. Don't know if that formula is correct or not, just used it to see if it would stop at my risk of 2%.

You need to use some tool like Metatrader / Ninjatrader / Gekko and backtest and see which configuration is the most promising one.

[preguiiins]

Thanks guys!

To test the strategies, is necessary to programm the code to run them? or is simple method to do it?