Thursday, June 2, 2011

Position SIZING

The chart below is a good example of why I don't spend much time on position sizing for my strategies. It shows what happens if position sizing of 1 contract per $10k is applied to the strategy. This is not an unreasonable rule, because based on performance, you can trade 1 contract with a $10k account. Therefore you should be able to trade 2 contracts with a $20k account. However when you apply this rule over the past ten years or so to my ESCombo system, you see that the account very quickly shoots up to trading 100 contracts (the limit) and after the ten years, your $10k has turned into over $16mm. If we let the contracts increase without limit, the growth would be astronomical. While this does show the benefits of position sizing over the long term, I think people would be put off by this kind of presentation, not to mention the fact that almost none of them would be able to have the discipline to follow the rules well enough the make it happen.

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