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

THE HAnDbook of TECHnICAl AnAlysIs

be initiated with a %risk below 1 percent. Trades with stopsizes that exceed the

threshold will automatically be placed with a maximum %risk of 1 percent (since

that represents the maximum allowable %risk per trade of the system).

the geolinear Money Management system (gMMs)

Although the dynamic sizing approach will yield tremendous profit for systems

that exhibit positive expectancy, it is highly disadvantageous for systems exhibit-

ing negative expectancy. Applying the WCS principle, we must assume that the

worst will happen and we will be unable to resolve any issues associated with it.

The most effective way to reduce the adverse effects of asymmetry when apply-

ing money management to everyday trades is to employ a two‐tier system. At the

lower tier, all trades are executed via a fixed‐sizing approach. This reduces the

adverse effects of asymmetry, affording the trader an opportunity to trade back

to profitability should losses be incurred. Once a specified number of trades have

been executed, the new tradesize will now be recalculated based on the current

equity in the account. This represents the second tier of risk management. In this

way, traders can still access the power of compounding by applying it only after

a certain number of trades have been made, while removing the effects of asym-

metry from all the daily or individual trades. For more details of the GMMS ap-

proach, refer to the book The Wiley Trading Guide (Volume II) where the author

discusses trading with a two‐tiered money management approach.

Chapter 28 Review Questions

1. List and explain the six passive components of a money management system.


2. Describe the relationship between the six passive components of a money
   management system.


3. How can traders reduce the effects of asymmetry in trading?


4. What is the difference between fixed and dynamic sizing?


5. Describe the two uncontrollable factors in trading and how they affect
   performance.


6. How would you use the R/r ratio setup effectively?


7. What are the advantages of using a stochastic exit?


8. Calculate the minimum %win for a system with an R/r ratio of 5:1.

referenCes

Balsara, Nauzer J. 1992. Money Management Strategies for Futures Traders. Hoboken,

NJ: Wiley Finance.

Gehm, Fred. 1995. Quantitative Trading and Money Management. Scarborough, Canada:

Irwin Professional Publishing.

Tharp, Van K. 2006. Trade Your Way to Financial Freedom. New York: McGraw‐Hill.

The Wiley Trading Guide, Volume II. (Milton, Queensland: John Wiley & Sons Australia.