I'm currently working on a position sizing algorithm for my trading system. By combining fixed ratio money management and setting the stop loss based on the current ATR value I receive reasonable position sizes. However, this system breaks down as soon as I consider holding multiple positions at once.
Let me give you some context. Let's assume I have a \$10k trading account and I am trading stocks. On each trade I'm willing to risk a maximum of 2%, meaning \$200 (of course this figure'll change as soon as my trades go towards or against me). My simple EMA Crossover strategy on the hourly timeframe gives a buy signal for AAPL. Current Price for AAPL is \$204.96. 14period ATR is at 6.75, meaning that with a x*ATR with x=1 I'll place my stop loss at \$198.21 resulting in a risk-per-share of \$6.75. \$200/\$6.75 gives me 29.63, meaning that I can purchase 29 shares of AAPL when my stop loss is at \$198.21 and I'm willing to risk a maximum of \$200. 29 * 204.96 gives \$5943.84 or in other words the position size for this particular AAPL trade is 59.4% of my capital.
Now let's assume I want to keep my portfolio diversified and I'm willing to take up a maximum of 10 positions because a maximum of 20% risk at any time sounds reasonable. If I continue calculating my position sizes in the described manner I'll never fit more than two positons in my portfolio. I figured out that I can get smaller position sizes by lowering the risk per trade (e.g. 1% instead of 2%) or by giving the stop loss a bit more space (e.g. 3*ATR instead of 1*ATR). But is this the only way to achieve a more reasonable diversification?
I suppose I'm correctly applying my risk & money management rules, however, I'm not happy at all about the position sizes since I'd like to have more concurrent positions. Did anyone of you have a similar problem once? Does anyone have a more sophisticated algorithm that also considers the desired amount of max positions?