THE HAnDbook of TECHnICAl AnAlysIspossible to control the winning percentage of our trades, but it is possible to
control risk and determine the worst‐case scenario loss. Furthermore, maximizing
the probability of profitability is a relatively more aggressive approach as com-
pared to minimizing the probability of loss, which is essentially a more defensive
approach to trading. See Figure 28.2.
The dual function of money management may be classified as:
- Sizing an exposure
- Managing an exposure
Sizing an exposure is a classified as a pre‐entry activity, where its six passive
components of sizing (i.e., capital, risk, stop, trade, reward, and R/r ratio) are all
determined long before any trade is initiated. Managing an exposure is essentially
a post‐entry activity and is considered to be a dynamic activity. It is concerned
with the management of a position via activities such as the rolling of stops and
the scaling in and out of positions.
The passive components of money management have a definite sequence of
determination:
- Capital Sizing: The trader must first decide on how much initial total capital
to risk in the markets. - Risk Sizing: The trader must then decide how much or what percentage of that
initial capital to risk per trade in the markets. This is denoted as the dollar risk
per trade, or $risk.
figure 28.2 A Trader’s Primary Functions.