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I see money management, or bet sizing, as addressing both risk
management and position sizing. Proper money management
inherently manages and quantifies risk. It balances the trade-off
between risk and return.
Two examples for those who have not spent time on this subject
yet. A futures trader develops a new system and decides to
begin trading at a rate of one contract per entry signal. After a
time, profits accumulate and the trader decides to begin trading
three contracts. The next trade is a big loss and the system is
discarded as being too risky. The problem is not that the system
is too risky, but that the trader hasn't the foggiest idea whether
he is overtrading or undertrading his account.
Now let's say, instead, the trader remains trading one contract
and moderate, but not spectacular, profits are made. Eventually
he discards the system as not profitable enough. But the
problem is actually that the trader is not selecting the optimum
position size.
Your own system, Terry, of risking a small percentage of your
account on each trade is, in fact, both risk management and
position sizing. It is a fixed fractional (Fixed f) anti-martingale
system, where position size increases as you profit, and it
decreases when you take losses. It will give you geometric
returns with arithmetic changes in risk. My question, though,
is how do you know that the percentage you choose is correct.
I'm not a great proponent of Optimal f or any other particular
money management system. What I do advocate (and I give
Ralph Vince full credit for my own epiphany) is quantifying risk
and return and making an informed decision.
----- Original Message -----
From: "Terry Willett" <t.willett@xxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Saturday, August 11, 2001 5:41 AM
Subject: money management
> Now that the subject of money management has come up, I have a question for
> those that may know. I have read several authors on the subject, but I
> still don't get it. I understand risk management (risking a small % of ones
> trading account on each trade), which I practice. What I don't get is money
> management by position sizing using optimal f or some other formula when
> that would violate risk management. How are these two ideas coordinated, or
> do I miss the concept altogether? Terry
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