THE HAnDbook of TEcHnicAl AnAlysis- Money management: This involves the effective apportioning or sizing of risk
and equity with respect to a trading system. It involves capital sizing, percent-
age risk sizing, stop sizing, trade sizing (size of the position), reward sizing
(amount of take profit), and reward to risk ratio sizing (which determines the
minimum average winning percentage of the system).
See Figure 29.1.
It is imperative that the trader decides on the trading approach and all its de-
sign implications before risking capital in the markets. A well‐conceived trading
system should take into account:
■ (^) The type of markets it will be used to trade in
■ (^) Whether it is a trend‐following or counter‐trend methodology
■ (^) The setup and filter specifications to be employed in order to determine entries
and exits
■ (^) The frequency of trade signals expected for the setup and filters employed and
the maximum rate of loss under the worst‐case scenario
■ (^) The amount and type of risks associated with trading a particular market and
the measures required to reduce such risks
■ (^) The minimum amount of capital required to trade a particular market
■ (^) The appropriate backtesting and forward walkthrough tests required to deter-
mine if a strategy is profitable (at least over the test period)
■ (^) The level of participation and commitment required of the trader to manage
such an approach
■ (^) The trading platform limitations and how they affect the execution of the strategy
Figure 29.1 Components of a Trading System and the Effective Trader.