The Successful Trader's Guide to Money Management

APPENDIX I

I.1 The Impact of a Trading System on Planning

The classic approach described in this book involves applying a money management model to a system, or portfolio of systems or instruments, to maximize their effectiveness.

As mentioned in the book, money management won't transform a losing system into a winning one, or eliminate particularly critical points inherent to the same system; however, creating a winning model after developing the basic system may not always be the most effective way to exploit the profit amplification effect.

If we know the intervention dynamics of the money management algorithm, it may be possible to reconsider some aspects that marked the stages of development of the operating rules, considering not the single trading system as the final product but rather, the whole system + position sizing package.

In order to better understand this aspect, let's take a specific example to see how a change made to the classic approach can produce indubitable benefits.

I.2 The Trading System

For the first stage, we'll develop a banal automatic trading system and take a look at the considerations that resulted in the final product.

For our example, we'll use Euro Stoxx 50 futures traded on EUREX. This market is one of the most liquid in the world, so it's a good example of an underlying that can be traded with a growing number of contracts.

Every tick of the instrument is equal to one point of the same, with a value of 10 euros.

We'll create a system to ...