PMKing Trading LLC
Practical Position Sizing
***** OMG *****

Position-sizing strategies answer the question “how big” a position to take from the start of the trade at the entry, all through the life of the trade until the exit. Position-sizing is like the volume control on your music CD player – it can’t actually change the music (the underlying system), but if you have it turned up too loud you will get distortion (blow up your account) and too low you won’t be able to hear the music (won’t meet your objectives).

Position-sizing is the bridge from the core expectancy of your trading system to meeting your objectives. Obviously position-sizing cannot make a negative expectancy trading system make money so you need to develop and test a complete, positive-expectancy trading system that suits your personality and requirements before you even consider what good position-sizing looks like.

In this mini-eBook we discuss the 6 main types of position-sizing strategies:

  • Fixed Size
  • Martingale
  • Fixed Dollar Amount
  • Fixed Percent
  • Averaging Down
  • Scaling In

With examples from a simple trend following system we developed in a previous mini-Ebook in the SmartTrader series called “Exits Are Where the Money Is” we will demonstrate how, just by changing the position-sizing strategy (i.e. each strategy gets exactly the same set of trades – only the sizes are different), a system’s performance can be adjusted to suit your particular objectives and requirements.

The 6 systems we analyze are all based on the S&P 500 and coded in TradeStation®:

  • System 6 – Trades 1 share per trade
  • System 7 – Doubles the trade size after a loser (Martingale)
  • System 8 – Risks a fixed dollar amount per trade
  • System 9 – Risks a fixed percentage of account value per trade
  • System 10 – Adds to losing trades (Averaging Down)
  • System 11 – Adds to winning trades (Scaling In).

System number starts from 6 to avoid confusion with the previous systems discussed in the SmartTrader mini-eBook “Exits Are Where the Money Is”.  The historical hypothetical results from TradeStation® of each system will be compared to see how the position-sizing algorithm affects the overall performance of the system.

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