The Risk of Trading: Mastering the Most Important Element in Financial Speculation

MASTERING INCREASES IN SHARE SIZE

Pure trade data information all the way up to refined KPI reporting statistics should contain both risk and compliance elements. This should be the framework of your success model. If I am compliant with my plan execution and within my risk-to-reward parameters, I know I will be successful over time. As an expert in managing risk, one needs to follow an extremely rigorous risk management plan, which is part of your overall trading plan. Contract size should be based on the concept of the Kelly criterion, which supports strict progressive-style criteria when successfully increasing trading capital and reducing risk during periods of drawdown. It also factors in the amount of edge to consider. Generally speaking, the greater the historical edge on a particular setup, the greater the odds for success, thus allowing an increase in share or contract size to use for the trade. The basic formula for the Kelly criterion is as follows:

f* = is the fraction of the current bankroll to wager; b = is the net odds, or risk-to-reward received on the opportunity, quoted as “b to 1”; p = is the probability of winning; q = is the probability of losing, which is 1 − p.

Rather than provide a lesson in risk analysis and statistical analytics, the objective of the principle is quite simple. When you have historical setups with a positive edge, you apply a percentage ...