Hey everybody and welcome back! One of the coaches at Unger Academy here and today we’re going to talk about the implementation of money management in a strategy that surely you have already seen. This strategy was developed by Davide Tagliabue and works on the Tesla stock market.
We’ll see what results we can get by applying the position sizing and which of the models I’ll show you works best. Because as we’re going to see, by applying a dynamic position sizing model to all of the historical data we can get pretty good results.
Initial Tests
Ok. So here you see the chart of Tesla. The timeframe is 15 minutes, so we’re going to use exactly the same chart Davide had used to create this strategy. As you probably remember, the system trades only long and enters at the breakout of the day’s high. It also features a time window, which means that the positions can only be opened from 11:30 am (you can see it above) to 3:30 pm, so basically almost up to the close of the session on this market.
Now what we’re going to do is to add some money management rules to this system, which I’ve already done. The members of the Unger Academy certainly already have and know how to find this information, namely the structure of the codes to be used to create money management models that can be used in our strategies. In particular today we’re going to focus on the Fixed Fractional model and the Percent Volatility model, which consists in calculating how many contracts to trade based on volatility and more in detail on the Average True Range, which as we already know is an indicator that measures the volatility in points of an underlying asset.
Let’s look at the performance report of the strategy without any kind of trade management applied. So this is the equity line of the strategy, and it’s very positive. As mentioned before, the strategy only performs long trades and has an average trade of over $110. At the moment, we’re using a fixed size with a counter value of about $10,000, which means that the average trade is over 1% and so it is obviously very positive.
Fixed Fractional Method
Let’s now see what happens to this strategy when we apply the different models of money management that we’ve set up. With mode number 1, we’re going to evaluate the Fixed Fractional model. So, we’re going to risk a fixed percentage for each trade equal to 2% of our capital.
So, basically, we’ll enter with an initial position of about $10,000 and then set a stop loss at 2% of our position, so initially it will be at $200, and a take profit of 7%, so $700.
So, basically, this allocation model will choose the number of shares to buy based on the change in absolute value of our capital. In a nutshell, if our capital in absolute value grows and there are positive trades, then we’ll buy more and more the next time. And vice versa, if the capital instead encounters losses, the next time after these losses we’ll invest less in absolute value. Why? Because the risk percentage, as we said before, is fixed at 2% in this case.
Then we click on “Ok”, close this window and wait for the end of the calculation. As you can see, something has changed. In the last trades we even buy something like 3,000 shares, while initially… Well, even at the beginning of the backtest, we actually bought 3,000 shares but Tesla’s price was much lower. You see it was around $3. There have been several stock splits so this part isn’t very precise, but in any case, to open a position worth $10,000, we needed to buy 3,000 Tesla shares. On the other hand, today the same 3,000 Tesla shares are certainly worth much more, because today’s price, or rather yesterday’s price, exceeds $875.
Now let’s take a look at the results. Obviously, in this case, it’s very difficult to evaluate the average trade. And not only is it difficult, but it is something you shouldn’t do because since the size of the position varies, it wouldn’t make any sense to calculate the average of all trades in order to estimate the average trade.
So let’s just look at the equity line of the strategy. You’ll see some crazy results immediately: 3.5 million dollars in profit. Well, actually there are also some remarkable drawdowns and certainly, the equity line now is not that great to see.
Let’s also go and look at the results year by year. As you can see, the more the strategy performs well, the more likely there will be an opportunity to increase the size. Then, of course, the years 2020, 2021 and even 2022 I’d say, are outsized right now compared to previous years. One of the reasons is that the Tesla stock has had an incredible rally – I mean something close to 10X just in the last couple of years. So stratospheric returns have been made, and by the way, Elon Musk is the richest man in the world. And so, these two years are definitely a bit distorted by the performance of the underlying stock that we’re trading.
Now we could also toy with the percentage of risk. For example, we may increase the percentage of risk, which I had already set at 2% and I can assure you that this is already high.
But let’s try, just for fun, to put it at 3% and see what happens. So, we’re going to risk more. Here, in fact you’ll see that the number of final contracts has increased. As many as 5,400 shares would be bought.
This is the equity of the system. It’s similar to the previous one and it doesn’t change much. So in a nutshell, we have seen that the Fixed Fractional definitely could make you more money, but you could also have more bellyaches, like in these cases here and also in these cases here. Because remember that, in theory, we were starting in 2010 with a capital of about $10,000.
One thing that I strongly recommend is not to evaluate the drawdowns in absolute value when you use the position sizing. Because if in recent years a strategy has performed well, it obviously risked more and lost more, so it doesn’t make much sense to look at the drawdown in absolute value.
What we think can give you a clearer indication is definitely the drawdown in percentage. In fact, you can see that we have more stable results, with peaks of even 30%, so not all that glitters is gold. So always do evaluate carefully also the drawdown but in percentage instead than in absolute value.
Percent Volatility Method
Now let’s see how the other type of allocation is doing now, so type number 2, which in this case refers to the Percent Volatility model. So, we’ll calculate the number of contracts by placing the ATR in the denominator, namely the number of points of the last 5 days, because this ATR is calculated on a daily timeframe.
And you’ll see that things change here. In recent weeks this stock has been extremely volatile. Look at the drops here. From a value of over $1,000-$1,100 it has gone down to $800, which for a stock that is worth approximately a trillion dollars certainly is a big movement.
So what does the Percent Volatility model do? It lowers the number of contracts when the volatility rises in order to limit the risk.
So, let’s go and take a look at the equity line. Here things are definitely easier to evaluate and the equity is more linear in some ways. Of course, the years 2021 and 2020 are still very lively but the final net profit in this case would be only (so to speak) about $425,000.
The interesting thing is that now looking at the percentage drawdown of the strategy, you’ll see that the profits are lower, but also the percentage drawdown is lower, and as you can see it doesn’t go beyond 7%. So surely these are highly satisfactory results, that, from a certain standpoint, could also be preferable compared to those previously seen.
So, definitely a kind of attitude that, I’d say, especially in recent years, but also in these phases here, would have paid off at least in terms of bellyache on this stock.
Final Thoughts
So, as you can see, you can really do great things. Obviously, we’re looking at an extended time horizon here, more than ten years. Things in such a long time period can also change.
Money management is definitely an extra, something that could further improve our strategy. We’ve seen that even in this regard you can choose one method or another, and so I invite you to try money management and position sizing just to do a little training and why not, dream of making millions.
Below I’ll leave you a link that will take you to several useful resources including our best-selling book “The Unger Method”, which you can get by paying only the shipping costs, or you can book a free call with a member of our team, or register for a free webinar by Andrea Unger.
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And with that, we’ll see you soon! Bye-bye!
