[(1,000,000 * 0.01) / 0.2], for a total amount of $500,000 (50,000 * 10), once
again this only allows for two positions [Integer(1,000,000 / 500,000)].
To work around this, separate the stop loss (SL) from what I call the money
management point (MMP). So far, we’ve assumed SL to be equal to MMP, which
implicitly has resulted in the following formula:
ST (AC * f) / SL (AC * f) / MMP
Where:
MMP Money management point in distance from the entry price, to cal-
culate the number of shares to trade
However, by separating the two and placing MMP further away from the
entry price, we can lower ST and also MT, which makes it possible to be in more
positions at the same time. As a consequence of this, the fused in the formula ST
(AC * f) / MMP won’t represent the true fraction risked of the available equity,
but rather just a fictive fraction used to calculate ST and MT. Therefore, from now
on, let’s call the fin the formula ST (AC * f) / MMP for ffict, so that the formu-
la instead reads:
ST (AC * ffict) / MMP
Where:
ffictFictive fraction of capital to risk to calculate the number of shares to
trade
Because the account equity and the price of the stocks have nothing to do
with how many positions we can be in using a DRMM regimen, the formulas for
the average number of simultaneously open positions and the average percentage
amount of equity tied up in one position can be simplified to the following two
formulas, respectively:
MMP / ffict
and
ffict/ MMP
Figures 26.1 and 26.2 show how these formulas can be used to put together
tables that will help us get a feel for how to balance MMP and ffictagainst each
other, so that we can trade as many positions simultaneously as we desire. For
example, for an ffictof 2 percent, Figure 26.1 shows that we need the MMP to be
at least 20 percent away from the entry price so that we can be in 10 positions
simultaneously. Figure 26.2, in turn, shows that we then will tie up 10 percent of
our equity in each position, on average. To create the tables, simply type in the val-
ues for MMP and ffictmanually in column C and row 4, respectively, then:306 PART 4 Money Management