The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Money Management

3. Stop Sizing: Once the risk per trade is determined, the trader must now deter-
   mine the stopsize associated with an entry.


4. Trade Sizing: Once the stopsize is determined, the trader can calculate the
   size of the position per trade, which is normally found by dividing the dollar
   risk per trade ($risk) by the stopsize. In foreign exchange trading, the trade
   size is found by dividing the $risk by the stopsize and the dollar pip value
   ($pip):

Trade size Equity risk stopsize

Trade size FOREX risk

( ) $ /

( ) $

=

= //(stopsize pip value× )

5. Reward Sizing: Once the trade size is determined, the trader must now decide
   on how and where to take profit ($R).


6. Reward to risk Ratio (R/r Ratio) Sizing: The reward size and risk size chosen
   by the trader determine the final average R/r ratio per trade. This average R/r
   ratio will in turn determine the average minimum win percentage required for
   the strategy or system employed.

See Figure 28.3 for a flow chart of the sequence of sizing determination.

Dynamic money management has also a certain sequence for the determina-

tion of its parameters, namely:

1. Maximizing Positional Exposure: This involves the initiation of as many po-
   sitions as possible in the market without the raising the overall level of risk
   across all open positions. This can only be done by risk‐freeing each position
   via the use of any of the four stochastic exit mechanisms, before any new posi-
   tion is initiated.


2. Maximizing Trend and Range Profitability: This requires the trader to be
   flexible enough to employ the most effective entries, exits, pyramiding,

figure 28.3 Sequence of Sizing determination during the Passive Money Management

Stage.