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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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