Money Management
■ (^) Larger tradesizes requires a higher minimum %win
■ (^) There is an optimal tradesize or %r, for every R/r and minimum %win
the expectancy box problem
By taking profit and cutting loss based on predetermined fixed exits in R/r
ratio setups, we inadvertently set up an average R/r ratio and consequently
an average minimum %win condition. We must then constantly try to achieve
the minimum %win to keep our expectancy positive. Unfortunately, the %win
is an uncontrollable component of the system. One solution to significantly
mitigate the damaging effects of the expectancy box problem is to employ sto-
chastic exit mechanisms to allow for a greater variation in the R/r ratios within
the system.
the ease of recovery (eor)
Let us look at a multi‐timeframe setup where trades are initiated over the short
and longer term. Assume that the R/r ratios and $risk are identical. The shorter‐
term entries use five contracts while the longer‐term entries use two contracts.
For every loss over the shorter term, the longer‐term trades need to extend five
times the distance in order to neutralize the losses incurred over the shorter term.
Statistically, the rate of shorter‐term losses will occur more frequently than gains
from the longer‐term setups, raising the average rate of loss above the average rate
of gain experienced by the system, eventually swamping the account permanently.
This is one reason why multi‐timeframe trading is very damaging to the account
unless the trader knows how to counteract the imbalances. The best solution is to
trade within a single timeframe. For more details on EOR, refer to the book The
Wiley Trading Guide (Volume II) where the author discusses the median method
as a test for the degree of EOR within the system.
tradesizing
We shall now look at scenarios where making a profitable series of trades based on
technical analysis is almost impossible without proper tradesizing. Let us employ
a simple technical rule of entry. Breakout entries are triggered by a penetration of
the previous swing point with the stoplosses placed at the most recent significant
swing point before the breakout. See Figure 28.28.
figure 28.28 Simple Long and Short Breakout Entries.