Money Management
but reverses and takes out the SL1 stoploss, causing Trader B to lose $10. A short is
initiated at the same price level with a stoploss placed at SL2. Unfortunately, price
also takes out SL2, causing Trader B to lose another $30. Trader B enters a new
long breakout at the SL2 price level with a stoploss placed at SL3 and a take profit
also placed 50 points above the entry at Take Profit. Trader B finally exits with a
profit of $50 at the take profit. Overall, Trader B now makes $10 from the 3 trades.
Again, we see two traders trading the same entries and exits, yet the perfor-
mance differs drastically! And again, we see that entries and exits have nothing
much to do with profitability. Not only do we need to predict future price direc-
tion, which is hard enough, but we now also need to predict the correct tradesizing
approach to use in order to be profitable. Our probability of winning has just been
cut in half.
The solution to this is to use a tradesizing technique that the author has termed
proportional sizing. Proportional sizing functions as fixed‐lot sizing below a cer-
tain threshold and as percentage sizing above the same threshold. The trick is to
make sure that at least 90 to 95 percent of all stopsizes fall below this threshold.
The steps are as follows:- Perform a backtest to gauge the average stopsize for the strategy being
employed - Find the 95 percent threshold level by locating the two standard deviation
value for the average stopsize and adding this to the average stopsize (this
amount represents the threshold value) - Find the average tradesize by dividing the $risk per trade by the new stopsize
For stoplosses that exceed the threshold value, revert to percentage sizing to
determine the correct tradesize. This is easily done by dividing the $risk per trade
by the stopsize. Assume that the $risk corresponds to the maximum 1 percent
risk per trade for the system. With this technique, the majority of the trades willfigure 28.30 Comparing Percentage Sizing with Fixed‐Lot Sizing.