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that increasing position size because of experiencing a winning streak could result in the trade experiencing a loss or breaking evenif the additional contracts are added at the wrong time. Other traders will increase position size after a series of winning trades, and risk only the amount of previously generated profits. |
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Typically when traders increase their position size after a series of winning trades, they experience only a large number of breakeven trades. Unfortunately, traders who experience consistent trades that only break even eventually lose all their money. This is because profits must pay for losses. If the vast majority of trades break even, then there are no profits to pay for the losses. |
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Professional traders have realized that position size is totally dependent upon only one factor. This factor is the amount of capital available to be risked. They have learned from experience that the number of contracts traded is totally independent of whether they are experiencing a profit or a loss. As previously mentioned, poor money management strategies and a great trading methodology will always generate long-term losses. An average trading methodology with proper money management will always generate long-term profits. |
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A Counterview of Risk Management |
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Another interesting thing to keep in mind is that the money management rules mentioned so far are based originally on gambling and gaming theories. Unfortunately, a lot of people equate trading with gambling. Naturally if you do not have mastery of your virtues and vices, if you have not done the research and testing to develop your trading methodology and entry/exit strategies, then you are in fact gambling! |
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When you limit your risk to 5 percent of your total equity, you are in effect giving yourself an opportunity to continue trading up to 19 losers in a row! The problem is that if you have much more than 15 consecutive losses, your remaining capital may not be enough to cover the required margin. Another concept to remember is that the margin you are required to post by the brokerage firm is a deposit, and thus is not at risk per se. In actuality your entire net worth is at risk every time you make a trade, even if it is a one-lot yen contract. Don't believe me? Let us say that you opened an account for $5000 and went long on December yen (which happened to be the front contract), requiring a margin deposit of $2500, and your protective stop was $250 lower (5 percent of trading capital). Now, for argument sake, the Russians announce that the Sprately Islands and all the oil in |
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