Up until this point I haven’t discussed position sizing or money management in any detail. That isn’t to say I don’t value it; I agree in large part with position-sizing guru and author Ralph Vince, who states that position sizing is one of the most important things in trading. The problem is some people take that view to the extreme, and believe that position sizing is the only thing that matters. That is simply not true. Use superb position sizing with a losing strategy, and you’ll still lose in the long run.
Many people have written books about position sizing and money management, and just like with general trading books, some are good and some are bad. The best ones I have found include Van Tharp’s The Definitive Guide to Position Sizing (Van Tharp Institute, 2013 [2nd ed.]) and the numerous books by Ralph Vince. Vince’s books are more mathematically based, and tough for inexperienced traders to understand and follow, but the underlying messages he puts forth are usually good ones. So in this chapter I won’t try to recreate the wheel; I’ll instead refer you to those authors for more in-depth information. In this chapter, I’ll discuss how I employ position sizing, both for a single system and on a portfolio level. But first, I’ll share with you my thoughts on general position-sizing issues.
No Optimum Position Sizing
In all ...