Hi!
Most commonly used and popularized position sizing method is percent equity model i.e. trader should never risk more than certain percent of trading
capital on a single trade. Quite often this number is 2%. This can be anything - within trading there is no right or wrong answers. It all depends
from different factors:
*Goals
*Risk tolerance
*Account size
*Trading experience
*Trading style and strategy
One great position sizing technique is 'Market's Money'. Actually it is a way how trader can think (mindset) about his trading capital.
Concept is simple: there is my money and there is market's money. My money is my starting capital and all earned profits are market's money. Market's money will become
mine only if I convert it into my money. Until it has not been converted into my money, then I can risk more with it because it's not my money, it's market's
money. As I mentioned before, it is mindset. Some traders are able to think about trading capital that way, others are not. And that's fine, trader's are different.
For me this is a great position sizing technique. Trader can risk less with his "own" capital and more with "market's" capital.
Generally speaking we can group position sizing strategies into 2 groups: aggressive and defensive. Market's money goes into aggressive group. It can be used when trader's
one goal is to make high returns. I don't want to say exceptional because actually trader can also be conservative using market's money method.
There are numerous ways (thousands I guess) how to use market's money. Eventually it all comes down to how trader determines when market's money is converted into his.
Here are few examples:
*Time (days, weeks, months, years)
*Cash earned
*Percentage gain
*Trades (1, 2, 5, 10, 30 etc.)
*Tax purposes
*Mathematical formula
*Girlfriend's birthday 😀
Usually examples with biggest compounding effect come from:
1) Systems that have very high winning percentage
2) Infrequent conversions from market's money to trader's money
Here are few examples how to use market's money:
Let's say that trader has starting capital X $. Risk per trade is 2% of that equity. After turning profitable he/she is willing to increase risk. In addition
to initial risk (2%), trader is willing to add 5% from earned profit into every new trade. Trading period is 3 months. After that trader converts profits (market's
money) into his. Then everything starts over.
Chart 2
This example is suitable for day traders. Those traders know very well their system and that system wins on average 3 trades in a row until
losing trade occurs. If this system is generating thousands of signals per year then market's money compounding effect would be exceptional. In case of losing
streak trader must be willing to live through large drawdowns.
When trader uses different system (let's say some trend-following method with low winning percentage) then this position sizing method would not
work so well. Key is to know characteristics of your trading system/style and then figure out what kind of position sizing would be best fit.
In real life it is very hard to find these kind of systems that have high certainty about when losing trade happens. Mostly trade distribution is more random. Therefore most
traders should not use this example with real money. I just wanted to show some different variations about how it is possible to use market's money.
Conclusion:
If trader's trading system or style (here I mean also discretionary traders) is profitable, then using some creative position sizing methods allow to achieve
better results without changing the system. Some traders are constantly trying to improve their systems and make them perfect. Instead that, maybe it would be better
to spend some time in position sizing area.
Simple trading system/style + well thought position sizing method = Good System!
Lastly, it all depends what you find logical and what suits you. Trading with percent equity model is totally fine. Adding market's money to that model can give
higher compounding ability to profitable traders.
Thank you and have a nice day.
Cheers
Most commonly used and popularized position sizing method is percent equity model i.e. trader should never risk more than certain percent of trading
capital on a single trade. Quite often this number is 2%. This can be anything - within trading there is no right or wrong answers. It all depends
from different factors:
*Goals
*Risk tolerance
*Account size
*Trading experience
*Trading style and strategy
One great position sizing technique is 'Market's Money'. Actually it is a way how trader can think (mindset) about his trading capital.
Concept is simple: there is my money and there is market's money. My money is my starting capital and all earned profits are market's money. Market's money will become
mine only if I convert it into my money. Until it has not been converted into my money, then I can risk more with it because it's not my money, it's market's
money. As I mentioned before, it is mindset. Some traders are able to think about trading capital that way, others are not. And that's fine, trader's are different.
For me this is a great position sizing technique. Trader can risk less with his "own" capital and more with "market's" capital.
Generally speaking we can group position sizing strategies into 2 groups: aggressive and defensive. Market's money goes into aggressive group. It can be used when trader's
one goal is to make high returns. I don't want to say exceptional because actually trader can also be conservative using market's money method.
There are numerous ways (thousands I guess) how to use market's money. Eventually it all comes down to how trader determines when market's money is converted into his.
Here are few examples:
*Time (days, weeks, months, years)
*Cash earned
*Percentage gain
*Trades (1, 2, 5, 10, 30 etc.)
*Tax purposes
*Mathematical formula
*Girlfriend's birthday 😀
Usually examples with biggest compounding effect come from:
1) Systems that have very high winning percentage
2) Infrequent conversions from market's money to trader's money
Here are few examples how to use market's money:
Let's say that trader has starting capital X $. Risk per trade is 2% of that equity. After turning profitable he/she is willing to increase risk. In addition
to initial risk (2%), trader is willing to add 5% from earned profit into every new trade. Trading period is 3 months. After that trader converts profits (market's
money) into his. Then everything starts over.
Chart 2
This example is suitable for day traders. Those traders know very well their system and that system wins on average 3 trades in a row until
losing trade occurs. If this system is generating thousands of signals per year then market's money compounding effect would be exceptional. In case of losing
streak trader must be willing to live through large drawdowns.
When trader uses different system (let's say some trend-following method with low winning percentage) then this position sizing method would not
work so well. Key is to know characteristics of your trading system/style and then figure out what kind of position sizing would be best fit.
In real life it is very hard to find these kind of systems that have high certainty about when losing trade happens. Mostly trade distribution is more random. Therefore most
traders should not use this example with real money. I just wanted to show some different variations about how it is possible to use market's money.
Conclusion:
If trader's trading system or style (here I mean also discretionary traders) is profitable, then using some creative position sizing methods allow to achieve
better results without changing the system. Some traders are constantly trying to improve their systems and make them perfect. Instead that, maybe it would be better
to spend some time in position sizing area.
Simple trading system/style + well thought position sizing method = Good System!
Lastly, it all depends what you find logical and what suits you. Trading with percent equity model is totally fine. Adding market's money to that model can give
higher compounding ability to profitable traders.
Thank you and have a nice day.
Cheers