Position sizing really is one of the most important aspects of trading. Even small changes that you make to your position sizing algorithm or method can change total profits earned over even short periods of time by multiples. The same cannot normally be said for making minor changes to an individual systems entries or exits.
So whilst it could be said that the trading system makes you your money it is also the case that the position sizing method dictates just how much money you actually do make.
So in terms of terminal wealth position sizing is far more important than the trading system. Sadly most traders probably spend 95% of their time on the trading system and just 5% on money management and position sizing issues. This is not a productive allocation of what are finite resources.
Also you will often hear people say “I already know all I need to know about position sizing – I use fixed fractional”. Well yes that is a much used position sizing method and is certainly better than using no method at all , however, there are far superior methods that can be used that involve no more additional risk to own capital but which can improve results over relatively short periods of time by factors of 5 or 10 even 50 times.
There is a very big difference from earning say $10,000 from a system to earning $500,000 from that exact same system over exactly the same period of time. This is the sort of scale of improvement that can be achieved.
I post below four graphs showing results obtained from exactly the same individual real money trading system. The system incidentally is RV4 which is a fully automated E-mini Russell 2000 day trading system that at the time of writing can still be purchased from Pro-trader.
The first chart shows the results obtained trading just a one lot throughout the period from the beginning of 2008. A very acceptable $77,000 profit from trading just a single contract throughout that period. Nothing at all to be unhappy about earning $80,000 on a one lot – or is there ?
The second graph shows the results using a standard fixed fractional approach. As can be seen this triples profits to around $250,000. It is at this point that most people sit back and assume that this is all that they can achieve with position sizing. It is not – by a long way.
The third graph shows results using a third very simple method which rockets results to nearly $1 million !
And don’t forget that this is exactly the same number of trades from exactly the same trading system over exactly the same period of time but the results obtained can vary around $80,000 to around $3.5 million.
The actual method that I teach would-be showing profits in excess of $10 million at this stage.
These aggressive position sizing methods work exceptionally well with short term day trading systems such as I trade and Pro-trader sell.
So whilst it is important to concentrate on producing a system that has a positive expectancy in the longer term your time is far better spent seeking to maximise results through the use of more advanced position sizing algorithms and one or two other little known techniques taught on the course.
RV4 Emini Day trading system – one lot
RV4 Emini Day trading system – Fixed Fractional
RV4 Emini Day trading system – Extra aggessive
RV4 Emini Day trading system – Pro-Trader method