What fraction of the account to trade?

When you start trading, you must make two decisions: what position

open, long or short, and how much to trade. Decision on co-

The name always depends on the balance in your account. With an account of $ 10,000

acquiring 100 gold contracts would be too risky. If on

your account 10 million dollars, isn't it obvious that the acquisition of one

the gold contract will have almost no effect on the account? Whether we admit it or not

the decision as to how many contracts in a certain

the moment of time to trade depends on the level of the account balance. If we will

use a certain percentage of the account in each trade (in other words, when

we will trade in an amount correlated with the size of our account), then

we will achieve faster capital growth. The quantity depends not only on

balance in our account, and is also a function of some other

variables: our estimated worst-case loss in the next

transaction; the rate at which we want our account to grow; dependence on

past transactions. The fraction of the account to be used for trading will be

depend on many variables, and we will try to collect all these variables,

including the level of the account balance, in order to eventually accept a rather subjective

deciding how many contracts or stocks to trade. From

in this chapter, you will learn how to make mathematically correct decisions in

relation to quantity and not to base their actions on subjective and,

possible, erroneous judgment. You will see that if you use the wrong

quantity, you will have to pay an excessive price, and this price will increase as

time. Most traders do not pay enough attention to the problem

choice of quantity. They believe that this choice is largely random, and

it doesn't matter how much to use, only how much

they are right about the direction of the trade. Moreover, an erroneous

the impression that there is a direct relationship between how many contracts

discover, and how much you can win or lose over time. it

wrong. As we will see, the relationship between potential gain and

quantity is not expressed in a straight line. It's a curve. This curve has a peak, and

it is at this peak that we will reach the maximum potential gain. From

in this book, you will learn that the decision on the quantity used in a certain

the trade is just as important as the decision to go long or short. We

refute the false opinion of most traders and show that the account level

depends on the correct choice of the number of contracts no less than

from the correct direction of trade. You do not control prices, and it does not depend on you whether the next trade will be profitable or unprofitable. However, the number

the contracts you open is entirely up to you. Therefore your

resources will be used more efficiently by focusing on

the correct amount. With any transaction, you at least approximately assume

what the worst case loss could be. You may not even be aware of it

but when you start trading you have a feeling, even if

subconscious, what can happen in the worst case. Perception of the worst

case together with the level of balance on your account forms a decision on whether

how many contracts to trade.

Thus, we can say that there is a certain divisor (a number between 0

and 1) the largest estimated loss to quantify

contracts. For example, if with a $ 50,000 bill, you expect at worst

case, a loss of $ 5,000 per contract, and 5 contracts are open, then the divisor

will be 0.5, since:

50,000 / (5000 / 0.5) = 5

In other words, you have 5 contracts for a $ 50,000 account, i.e. 1 con-

path for every $ 10,000 of the balance. Would you expect the worst to lose

$ 5,000 per contract, so your divisor is 0.5. If u

you had one contract, then the divisor in this case would be the number 0.1, since:

50,000 / (5000 / 0.1) = 1

We will call this divisor variable f. Thus, consciously or subconsciously

in any case, you choose the f value when you decide how much

tracts or shares to acquire.

When you start trading, you must make two decisions: what position

open, long or short, and how much to trade. Decision on co-

The name always depends on the balance in your account. With an account of $ 10,000

acquiring 100 gold contracts would be too risky. If on

your account 10 million dollars, isn't it obvious that the acquisition of one

the gold contract will have almost no effect on the account? Whether we admit it or not

the decision as to how many contracts in a certain

the moment of time to trade depends on the level of the account balance. If we will

use a certain percentage of the account in each trade (in other words, when

we will trade in an amount correlated with the size of our account), then

we will achieve faster capital growth. The quantity depends not only on

balance in our account, and is also a function of some other

variables: our estimated worst-case loss in the next

transaction; the rate at which we want our account to grow; dependence on

past transactions. The fraction of the account to be used for trading will be

depend on many variables, and we will try to collect all these variables,

including the level of the account balance, in order to eventually accept a rather subjective

deciding how many contracts or stocks to trade. From

in this chapter, you will learn how to make mathematically correct decisions in

relation to quantity and not to base their actions on subjective and,

possible, erroneous judgment. You will see that if you use the wrong

quantity, you will have to pay an excessive price, and this price will increase as

time. Most traders do not pay enough attention to the problem

choice of quantity. They believe that this choice is largely random, and

it doesn't matter how much to use, only how much

they are right about the direction of the trade. Moreover, an erroneous

the impression that there is a direct relationship between how many contracts

discover, and how much you can win or lose over time. it

wrong. As we will see, the relationship between potential gain and

quantity is not expressed in a straight line. It's a curve. This curve has a peak, and

it is at this peak that we will reach the maximum potential gain. From

in this book, you will learn that the decision on the quantity used in a certain

the trade is just as important as the decision to go long or short. We

refute the false opinion of most traders and show that the account level

depends on the correct choice of the number of contracts no less than

from the correct direction of trade. You do not control prices, and it does not depend on you whether the next trade will be profitable or unprofitable. However, the number

the contracts you open is entirely up to you. Therefore your

resources will be used more efficiently by focusing on

the correct amount. With any transaction, you at least approximately assume

what the worst case loss could be. You may not even be aware of it

but when you start trading you have a feeling, even if

subconscious, what can happen in the worst case. Perception of the worst

case together with the level of balance on your account forms a decision on whether

how many contracts to trade.

Thus, we can say that there is a certain divisor (a number between 0

and 1) the largest estimated loss to quantify

contracts. For example, if with a $ 50,000 bill, you expect at worst

case, a loss of $ 5,000 per contract, and 5 contracts are open, then the divisor

will be 0.5, since:

50,000 / (5000 / 0.5) = 5

In other words, you have 5 contracts for a $ 50,000 account, i.e. 1 con-

path for every $ 10,000 of the balance. Would you expect the worst to lose

$ 5,000 per contract, so your divisor is 0.5. If u

you had one contract, then the divisor in this case would be the number 0.1, since:

50,000 / (5000 / 0.1) = 1

We will call this divisor variable f. Thus, consciously or subconsciously

in any case, you choose the f value when you decide how much

tracts or shares to acquire.

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