In cell D5: Type in the formula INT($C5/D$4), and drag and fill it into all
cells to S29.
In cell D34: Type in the formula IF(D5>0,1/D5,0)*100, and drag and fill it
into all cells to S58.
Note that the term “on average” is used, because just as the stop loss can fluc-
tuate with the average true range, so can the MMP. The next trick, then, is to fig-
ure out approximately how far it is to a certain percentage distance, on average and
over the long term. First, we need to figure out what our true fwill be, given a ffict,
a MMP, and a SL. If ffictand fare expressed as fractions (i.e., the percentage value
divided by 100), the formula is:fffict* (SL / MMP)For example, if the MMP is placed 10 percent away from the entry price, and
we calculate the number of shares and the amount of money to tie up in the trade
according to an ffictof 4 percent, then, if the trade hits the stop loss at, say 3 per-
cent away from the entry price, the true fof the available equity risked and lost on
the trade will be 1.2 percent [(4 / 100) * (3 / 10) * 100]. However, just as the loss-
es actually will be smaller than the fictive risk we take, so will the profits. From
the formula above, we can see that the larger the difference between SL and MMP,
the smaller the true profits and losses will be for any given ffict. This is also some-
thing we need to balance to find the desired smoothness and growth rate of the
equity curve.
The questions that now remain to be answered are how many positions, on
average, do we want to be in simultaneously, and how many markets do we need
to track for trading opportunities to make that possible? The first question you
must answer subjectively, with the answer based on your trading experience and
desire for action, but let’s say that we would like to be in 10 positions simultane-
ously, on average.
Having decided on an average of 10 positions, we can go back to the table in
Figure 26.1, where we can see that if we place the MMP 10 percent away from the
entry price, on average, then we should set ffictto no higher than 1 percent.
Likewise, if we set ffictto 2 percent, then we can place the MMP 20 percent away
from the entry price, on average. Because we know from experience that we most
likely won’t set ffictany higher than 2 percent or any lower than 1 percent, let’s try
to set MMP approximately 15 percent away from the entry price, so that the
desired amount of open positions corresponds to a ffictof 1.5 percent. Many times,
we might be in fewer positions and at times we might be in a few more. It all
depends on the volatility of the market, which will alter the magnitude of the true
range. On average, however, we will be in 10 positions simultaneously.
With this decision made, we need to go back to the normalized performance
summary for the system, which we made extensive use of in Parts 2 and 3, and fig-308 PART 4 Money Management