2011

Trevor Neils Master Class: Position Sizing

Trevor Neil BETA Financial Learning & Development Limited 04/08/2011

Trevor Neils Master Class

On the first Friday of each month at 2pm Singapore Time, 10am London time and at noon New York time, Trevor Neil holds a 45 minute technical analysis surgery looking at a specific aspect of technical analysis. These are more advanced sessions concentrating on trading techniques, sometimes asset class specific. Trevor Neil will share with you his market timing skill and experience. Here we take a small subject and cover it in detail. They are practical rather than theoretical. They are given remotely and live via WebEx and you can interact. There is an open question and answer session at the end. A full and detailed manual is subsequently provided for attendees. There is a small charge for the Master Class manuals. The surgeries are aimed at improving investor/trader skills and are not training in using Eikon, Metastock or 3000Xtra. Please ask you Thomson Reuters Trainer for help with the terminal itself. They are for educational purposes only. There are no investment recommendations implied in the examples.

Trevor Neils Friday Technical Analysis Surgery

On the third Friday of each month at 2pm Singapore Time, 10am London time and at noon New York time, Trevor Neil holds a 45 minute technical analysis surgery looking at a specific aspect of technical analysis. The purpose is to for you to gain a comprehensive understanding of technical analysis and market timing. They are given remotely and live via WebEx and you can interact. There is an open question and answer session at the end. A full and detailed manual is subsequently provided for attendees. The surgeries are free and aimed at improving investor/trader skills and are not training in using Eikon, Metastock or 3000Xtra. Please ask you Thomson Reuters Trainer for help with the terminal itself. They are for educational purposes only. There are no investment recommendations implied in the examples.

Charts and Data

All Charts and data are from Thomson Reuters and Eikon is used for analysis

Position Sizing
This session looks at the size of a trade that is appropriate. There is a small formula to use to ensure capital preservation while exposing yourself to enough risk to make a profit. As well as the usual manual, a small excel sheet will be supplied. If you do not understand this and have a grip on it, you should not be trading. As always, there are no recommendations implied or buy or sell signals generated. It is for educational purposes only.

Common ways to size trades

Trevor Neil
Trevor Neil has been a trader for over 30 years; starting at the age of 18 as a coffee floor trader for Merrill Lynch. He moved into other softs and then became a broker. It was then he became interested in technical analysis. At the time, the 70s, technical analysis was changing. It was moving from the pencil, ruler and graph paper to the PC. He became very involved in the early stages of the development of computerised technical analysis. When LIFFE opened, along with many commodities traders he moved into financial futures, then Forex and later equities. He worked as a broker, fund manager, analyst but always in the area of technical analysis. He served for many years on the board of The Society of Technical Analysts which awarded him MSTA. He has written many articles and is a popular conference speaker all over the world. In 1999 he became head of technical analysis at Bloomberg which he did for four years overseeing the development of charting on that platform. He left to form a successful hedge fund based in South Africa. He is now a director of BETA Group and works with traders at a large UK hedge fund offering a timing overlay. As such, he remains and active trader in the equities, Forex and derivatives markets. He is Consultant Editor of The Technical Analyst Magazine. He is an International Advisor to the MTA Foundation which promotes the understanding and adoption of technical analysis at universities. In 2010 he has started a small new hedge fund to trade his own funds. This 15 million fund trades a diversified portfolio and is 100% technically driven.

BETA Group
The BETA Group consists of BETA Financial Learning and Development Limited and BETA Educators Limited. BETA L&D Ltd offers institution skill enhancing seminars in the areas of market timing and behavioural finance. There are open course and in-house tailored events for many of the worlds best dealing desks. They also offer market consultancy, including trading system development and the production of white label technical analysis research.

Continuous Professional Development (CPD)

More and more regulators and professional bodies insist that members continually update their skills to ensure that they remain at the top of their careers. Both also expect the individual to manage their own CPD based on their own needs and the needs of the organisation they are part of. BETA Group can facilitate this process by courses that are of benefit to the financial services professional. This course counts as 60 minutes towards your required CPD Cycle and one CPD point for securities reps in the US. If you require a certificate of attendance, please send an e-mail to yvette.burfin@betagroup.co.uk.

BETA Groups Open Seminars

Trevor Neil gives frequent open seminars on market timing. He travels all over the world to give them with the help of Reuters Academy. These are usually in the form of a two-day course, Technical Analysis in the Dealing Room. The events are held in a local central hotel and, if possible, the afternoon of the second day is held as a workshop in the local Thomson Reuters office. This means attendees have a terminal each have a Reuters terminal to practice what they

Page | 3 www.betagroup.co.uk BETA Group2011

Common ways to size trades

have been taught and to run through current case studies. The seminar numbers are limited to just ten. This ensures near one-to-one attention from Trevor Neil during the two days. In this way the course content can be totally personalised, ensuring that all attendees get the maximum benefit from these mentoring sessions. In 2009 we started offering our popular Technical Analysis in the Dealing Room in French. We have run courses in local languages in France and West Africa. Colleagues at BETA Group offer seminars in Risk related matters, options techniques and strategies and trading psychology and profiting from behavioural biases. See www.betagroup.co.uk for details.

Want a Seminar near you?

In the last 12 months BETA Group has run about 50 seminars with Thomson Reuters in Europe, Middle-East, Africa and Asia. To see what we have planned in conjunction with Thomson Reuters see www.betagroup.co.uk/courses or Knowledge Network. If you would like seminar run in your city, please contact your local Thomson Reuters Knowledge Manager and ask them to contact us. They book us to come if they see there is demand. If enough of you ask your Thomson Reuters Knowledge Manager to book him, Trevor Neil will come. He will be visiting Scandinavia, Eastern Europe, North America, Asia and Australia in the second half of the year. Make sure he comes to your City.

BETA Groups In-house Seminars

We run specialised seminars for firm tailored to your firms needs. These vary in length and content. We can run seminars for new starters to advanced subjects such as Ichimoku, Elliott Wave, Market Profile and Short Term Trading Techniques for experienced professionals. Apart from our open seminars in 2010 we have taught about 300 traders, analysts, portfolio managers and others in small groups often five to ten at their offices. These seminars focus on your securities, time-frame and learning objective. We can even run seminars for your clients as part of your marketing effort too. We are flexible; we can work in the evenings, at the weekends; whatever suits your desk. These in-house seminars can be surprisingly economical and certainly beneficial in this environment. Ask yvette.burfin@betagroup.co.uk for details

e-Learning
We have developed an e-Learning course in technical analysis which you can do at your own pace and convenience. It is designed to prepare you for Level I of the CFTe qualification if you wish or to get you fully competent as a trader. See http://www.betagroup.co.uk/elearning for this exciting new service and details of the IFTA qualification. Ask paddy.osborn@betagroup.co.uk for details

Coaching and Mentoring

This is the ultimate option. These are totally individualised skill enhancement programs. It is not cheap but you can benefit from decades of experience and skill in a short period in time. In this

Page | 4 www.betagroup.co.uk BETA Group2011

Common ways to size trades

way, it is actually an incredible bargain. Ask yvette.burfin@betagroup.co.uk for details of our coaching, and the less expensive alternative, our mentoring services. Mentoring is usually given on a one-to-one basis via a WebEx call.

White Label Research

At BETA Group we have the skill and resource to write white label technical analysis research for your firm. This is a cost effective solution for firms who would like to have this powerful marketing tool but do not have the budget or ability to produce it. BETA Group can produce regular research to your specification, with your branding, to the highest standard and at an economical price. Ask paddy.osborn@betagroup.co.uk for details and a sample of our work.

Page | 5 www.betagroup.co.uk BETA Group2011

Common ways to size trades

Trevor Neil MSTA MCSI

Trevor Neil personally runs seminars all over the world helping traders; analysts and portfolio managers improve their market timing skills. His experience and his ability to bridge the gap between the books and theory of technical analysis and the practical difficulties of taking a trade confidently have been recognised by those attending his seminars. Go to www.betagroup.co.uk for details of his calendar of seminars. You can also look for his seminars in your area by going to Reuters Academy on your terminal. You can request Reuters and BETA Group to run a seminar in your City by sending a message to your Thomson Reuters Training Manager. These seminars are chargeable but, with Thomson Reuters marketing help, they are able to keep the fee to well below the price of many different investment courses. Many firms ask him to give a tailored seminar in-house. These seminars are very popular. The content is designed to meet your learning objective, covering your markets in your time frame. They are economical too for just five or more people. Send a message to yvette.burfin@betagroup.co.uk that can send you details of availability and cost structure.

If you would like to attend one of BETAs seminars go to www.betabroup.co.uk and click on Calendar. If you would like Trevor Neil to come to your institution to give a seminar in person, please contact yvette.burfin@betagroup.co.uk. These sessions can be economical and requires a low minimum number of people. Subjects covered are technical analysis at all levels, tailored for spot trader, equity trader, fixed income analyst (or whatever) and specialised subjects like Profiting from Behavioural Finance, DeMark Studies, Short Term Trading Techniques, Ichimoku Charting, Algorithmic trading.

BETA Learning & Development Ltd Pantiles Chambers 85 High Street Royal Tunbridge Wells Kent TN1 1XP, United Kingdom www.betagroup.co.uk Tel: +44 189250 6864 Fax: +44 870 622 1624

Page | 6 www.betagroup.co.uk BETA Group2011

Common ways to size trades

Contents
Trevor Neils Master Class ....................................................................................................... 2 Trevor Neils Friday Technical Analysis Surgery ...................................................................... 2 Charts and Data....................................................................................................................... 2 Position Sizing ......................................................................................................................... 2 Trevor Neil ............................................................................................................................... 3 BETA Group ............................................................................................................................ 3 Continuous Professional Development (CPD).......................................................................... 3 BETA Groups Open Seminars ................................................................................................ 3 Want a Seminar near you? ...................................................................................................... 4 BETA Groups In-house Seminars ........................................................................................... 4 e-Learning ............................................................................................................................... 4 Coaching and Mentoring .......................................................................................................... 4 White Label Research ........................................................................................................... 5 Trevor Neil MSTA MCSI........................................................................................................... 6

Common ways to size trades ........................................................................................... 8 Martingale and anti-Martingale ......................................................................................... 8

Trade size based on risk .......................................................................................................... 9 Optimal f ................................................................................................................................ 11

Monte Carlo.................................................................................................................... 12
Draw-down ............................................................................................................................ 12 Generating a Monte Carlo sequence ..................................................................................... 13

Robustness .................................................................................................................... 14 References ..................................................................................................................... 14

Page | 7 www.betagroup.co.uk BETA Group2011

Common ways to size trades

Most trading experts agree that money management is one of the most critical aspects of trading. Position sizing is one of the key elements of money management. It is the process of determining how much to trade. If you trade stocks, its the number of shares to trade. If you trade futures or options, its the number of contracts. If you trade forex it is the amount in dollars or yen. Position sizing can be used to increase returns, reduce risk, improve the risk/return ratio, and smooth the equity curve, among other goals. Position sixing can be used to ruin you. Position sizing is particularly important when leverage is involved, as with futures and forex trading. If you trade too many futures contracts, a string of losses could force you to stop trading. On the other hand, if you trade too few contracts, much of your account equity will sit idle, which will hurt your performance. Finding the right balance is a key element of risk management.

Common ways to size trades

There are many different ways to vary the number of contracts or shares when trading. Some of the most commonly used methods are listed below. Fixed size. The same number of contracts or shares is applied to each trade; e.g., two contracts per trade. Fixed dollar amount of equity. A fixed dollar amount of account equity is needed for each contract or share; e.g., $5000 of account equity per contract. Fixed fractional (also known as fixed risk). The number of contracts or shares is determined so that each trade risks a specified fraction of the account equity; e.g., 2% of account equity is risked on each trade. Fixed fractional position sizing has been written about extensively by Ralph Vince. See, for example, his book Portfolio Management Formulas, John Wiley & Sons, New York, 1990. Fixed Ratio. The number of contracts or shares increases by one for each delta amount of profit earned per contract. For example, if the delta is $3000, and the current number of contracts is two, youll need $6000 of profit before increasing the number of contracts to three. Margin Target. Margin target position sizing sets the size of each position so that the chosen percentage of account equity will be allocated to margin. For example, if you choose a margin target of 30%, then 30% of the account equity will be allocated to margin. Leverage Target. This method sets the position size so that the leverage of the resulting position matches the selected target. Leverage is defined as the ratio of the value of the position to the account equity. For example, if 1000 shares of a $30 stock are purchased with a $25,000 account, the leverage would be $30,000/$25,000 or 1.2. Percent Volatility. The per cent volatility method sizes each trade so that the value of the volatility, as represented by the average true range (ATR), is a specified percentage of account equity.

Martingale and anti-Martingale

With each of these methods, except for fixed contract position sizing, the number of contracts or shares increases as profits accrue and decreases as the equity drops during a drawdown. Position sizing methods that use this approach are known as anti-martingale methods. Anti-martingale

Page | 8 www.betagroup.co.uk BETA Group2011

Martingale and anti-Martingale

methods take advantage of the positive expectancy of a winning trading system or method. If you have an edge with your trading (i.e., your trading method is inherently profitable), you should use an anti-martingale method, such as one of those listed above. The alternatives, known as martingale methods, decrease the amount at risk after a win and increase the amount at risk after a loss. A commonly used example is doubling down after a loss in gambling. Martingale methods are most often used by gamblers, who trade against the houses advantage. Provided you have a profitable trading method, anti-martingale methods are always preferable over the long run because theyre capable of growing your trading account geometrically. However, its sometimes possible to lower your risk by taking advantage of patterns of wins and losses, similar to martingale methods. Two ways to do this are via dependency rules and using equity curve trading. Both of these methods can be used in addition to whichever position sizing method you choose. While martingale methods are not recommended by themselves, these adjustments to the antimartingale methods listed above can sometimes prove beneficial. For example, if your trading system or method tends to have long winning and losing streaks, it might be beneficial to skip trading after a loss until the first skipped trade would have been a winner. Resume taking the signals until a loss is encountered. This is an example of a dependency rule for systems with positive dependency. Alternatively, you might try trading the equity curve. For example, you could stop taking the trading signals when the moving average of the equity curve crosses below the equity curve line. Resume trading when the moving average crosses back above the equity curve.

Trade size based on risk

Its a common axiom of investing that the greater the risk the greater the reward. One method of sizing short-term trades based on this principle is fixed fractional position sizing. The idea behind the fixed fractional method is that you base the number of contracts or shares on the risk of the trade. Fixed fractional position sizing is also known as fixed risk position sizing because it risks the same percentage or fraction of account equity on each trade. For example, you might risk 2% of your account equity on each trade (the 2% rule). Fixed fractional position sizing has been written about extensively by Ralph Vince. See references below. The risk of a trade is defined as the dollar amount that the trade would lose per contract or share if it were a loss. Commonly, the trade risk is taken as the size of the money management stop applied, if any, to each trade. If your trading strategy doesnt use protective (money management) stops, the risk can be taken as the largest historical loss. This was the approach Vince adopted in his book Portfolio Management Formulas. The equation for the number of contracts or shares in fixed fractional position sizing is as follows: N = f * Equity/| Trade Risk | where N is the number of contracts or shares, f is the fixed fraction (a number between 0 and 1), Equity is the current value of account equity (i.e., the value of account equity just prior to the trade

Page | 9 www.betagroup.co.uk BETA Group2011

Martingale and anti-Martingale

10

for which youre calculating N), and Trade Risk is the risk of the trade per contract or share for which the number of contracts or shares is being computed. The vertical bars (|) mean that we take the absolute value of the trade risk (risk is usually given as a negative number, so we make it positive).

Why is Fixed Fractional trade sizing superior to Fixed dollar or Fixed sizing?
Let me demonstrate with a betting example. Firstly, for our experimental betting system we must define the bet. In each case we will always bet $20 on Heads and we have a 2:1 profit loss ratioi.e we win $20 and lose $10 when we lose. This is a simulation of a good trading system and the effect trade size has on it in the long run. The first way to define the bet is to make it a constant fixed amount, say $10 each time, no matter how much we win or lose. This is a Fixed Size system. In this case, as in fixed-betting systems in general, our $1,000 equity might increase or decrease to the point where the $10 fixed bet becomes proportionately too large or small to be a good be We also run the same experimental betting system where we define the bet as Fixed Fraction of our equity. A 1% fixed-fraction bet would, on our original $1,000, also lead to a $10 bet. The result of the first trade (bet) is the same. But it changes over time. With a Fixed Fractional trade size (bet), as our equity rises and falls, our fixed-fraction bet stays in proportion to our equity. In the table below we compare the effects of these two position sizing systems. One interesting artefact of fixed-fraction betting is that, since the bet stays proportional to the equity, it is theoretically impossible to go entirely broke so the official risk of total ruin is zero

Simulation
Lets start trading (betting):

Fixed Bet $10

Fixed-Fraction Bet 1%

Start

1000

1000

Heads

1020

1020

Tails

1010

1009.80

Heads

1030

1030

Tails

1020

1019.70

Page | 10 www.betagroup.co.uk BETA Group2011

Martingale and anti-Martingale

11

Heads

1040

1040.09

Tails

1030

1029.69

Heads

1050

1050.28

Tails

1040

1039.78

Heads

1060

1060.58

Tails

1050

1049.97

Both systems make $20.00 (twice the bet) on the first toss that comes up heads. On the second toss, the fixed bet system loses $10.00 while the fixed-fraction system loses 1% of $1,020.00 or $10.20, leaving $1,009.80. The results from both these systems are approximately identical at the start. Over time, however, the fixed-fraction system grows exponentially and surpasses the fixed-bet system that grows linearly. Also note that the results depend on the numbers of heads and tails and do not at all depend on the order of heads and tails. In fixed fractional position sizing, the number of contracts or shares per trade increases over time as profits accumulate, which allows the trader to more fully utilise the available account equity. Likewise, the number of contracts or shares per trade drops when account equity declines after a series of losses, reducing the impact of subsequent losses.

Optimal f
Fixed risk position sizing can be used to implement another one of Vinces methods, called optimal f position sizing. This is a generalized version of a classic formula called Kellys formula, which provides the fixed fraction that maximizes the geometric growth rate for a series of trades where all the losses are one size and all the wins are another size. In this case, the optimal fixed fraction is given by the following equation: f = ((B + 1) * P 1)/B where B is the ratio of a winning trade to a losing trade, and P is the percentage of winning trades. Optimal f position sizing extends the Kelly formula so that the wins and losses can all be different sizes. Optimal f calculates the fixed fraction that maximizes the rate of return for a given series of

Page | 11 www.betagroup.co.uk BETA Group2011

Monte Carlo

12

trades. While this sounds like a good idea, in practice the optimal f value (or the f value from the Kelly formula) often results in drawdowns that are too large for most traders to tolerate. Also, relying on the historical sequence of trades is risky in that the sequence of profits and losses in the future may be less favourable than what was encountered historically. As a result, the drawdowns in the future could be much larger than predicted by the historical sequence of trades. Performing a Monte Carlo analysis on the trade sequence is one way to generate a more conservative estimate of the future worst-case drawdown.

Monte Carlo
A less risky alternative to optimal f is to optimize using Monte Carlo analysis and with a specified limit on the maximum allowable drawdown. This will generally yield a much smaller and therefore less risky fixed fraction than Optimal f. Before trading the markets with real money, its essential to understand the risk of the trading strategy or method you intend to use. One way to assess risk is by testing your strategy over historical market data to see how well the strategy would have done in the past. While this socalled back testing approach is very helpful, one of the drawbacks is that the future is never exactly the same as the past. Employing Monte Carlo analysis can help to address this problem. Monte Carlo analysis is a computational technique that makes it possible to include the statistical properties of a models parameters in a simulation. In Monte Carlo analysis, the random variables of a model are represented by statistical distributions, which are randomly sampled to produce the models output. The output is therefore also a statistical distribution. Compared to a simulation method that doesnt include random sampling, the Monte Carlo method produces more meaningful results, which are more conservative and also tend to be more accurate when used as predictions. When using use Monte Carlo analysis to simulate trading, the trade distribution, as represented by the list of trades, is sampled to generate a trade sequence. Each such sequence is analysed, and the results are sorted to determine the probability of each result. In this way, a probability or confidence level is assigned to each result. Without Monte Carlo analysis, the standard approach for calculating the historical rate of return, for example, would be to analyse the current sequence of trades using, say, fixed fractional position sizing. It might be found that the rate of return over the sequence was 114%. With Monte Carlo analysis, on the other hand, hundreds or thousands of different sequences of trades are analysed, and the rate of return is expressed with a probability qualifier. For example, the rate of return as determined by Monte Carlo analysis might be 83% with 95% confidence. This means that of all the thousands of sequences considered, 95% had rates of return greater than or equal to 83%.

Draw-down
Monte Carlo analysis is particularly helpful in estimating the maximum peak-to-valley drawdown. Drawdown is often used as a proxy for the risk of a trading strategy. Consequently, improving the calculation of the drawdown enables a better estimate of the risk of a trading system or method.

Page | 12 www.betagroup.co.uk BETA Group2011

Monte Carlo

13

Although we cant predict how the market will differ tomorrow from what weve seen in the past, we do know it will be different. If we calculate the maximum drawdown based on the historical sequence of trades, were basing our calculations on a sequence of trades we know wont be repeated exactly. Even if the distribution of trades (in the statistical sense) is the same in the future, the sequence of those trades is largely a matter of chance. Calculating the drawdown based on one particular sequence is somewhat arbitrary. Moreover, the sequence of trades has a very large effect on the calculated drawdown. If you choose a sequence of trades where five losses occur in a row, you could get a very large drawdown. The same trades arranged in a different order, such that the losses are evenly dispersed, might have a negligible drawdown. In using a Monte Carlo approach to calculate the drawdown, the historical sequence of trades is randomized, and the rate of return and drawdown are calculated for the randomized sequence. The process is then repeated several hundred or thousand times. Looking at the results in aggregate, we might find, for example, that in 95% of the sequences, the drawdown was less than 30% when 4% of the equity was risked on each trade. We would interpret this to mean that theres a 95% chance that the drawdown will be less than 30% when 4% is risked on each trade.

Generating a Monte Carlo sequence

In general, there are two ways to generate the sequence of trades in a Monte Carlo simulation. One option is to construct each sequence of trades by random sampling of the same trades as in the current sequence, with each trade included once. This method of sampling the trade distribution is known as random selection without replacement. Another possible sampling method is random selection with replacement. If this method were used, trades would be selected at random from the original list of trades without regard to whether or not the trade had already been selected. In selection with replacement, a trade could occur more than once in the new sequence. The benefit of selection without replacement is that it exactly duplicates the probability distribution of the input sequence, whereas selection with replacement may not. The drawback to selection without replacement is that the randomly sampled sequences are limited to the number of trades in the input sequence. If you have a short sequence of trades (say, less than 30 trades), this may limit the accuracy of certain calculations, such as the drawdown.

Pyramiding
In the case of a random process, such as coin tosses, streaks of heads or tails do occur, since it would be quite improbable to have a regular alternation of heads and tails. There is, however, no way to exploit this phenomenon, which is in itself random. In non-random processes, such as secular trends in security prices, pyramiding and other trend-trading techniques can be effective. Pyramiding is a method for increasing a position, as it becomes profitable. While this technique might be useful as a way for a trader to pyramid up to his optimal position, pyramiding on top of an already-optimal position is to invite the disasters of over-trading. In general, such micro-tinkering with executions is far less important than sticking to the system. To the extent that tinkering allows

Page | 13 www.betagroup.co.uk BETA Group2011

Robustness

14

a window for further interpreting trading signals, it can invite hunch trading and weaken the fabric that supports sticking to the system. The Martingale system is a method for doubling-up on losing bets. In case the doubled bet loses, the method re-doubles and so on. This method is like trying to catch a falling sword, one day a losing streak will stab you.

Robustness
The problem with all this and often missed by our Quant friends is that the worse is always ahead of us and not behind us. All this work is on past events. Certainly these methods increase our confidence in a method of trading and position sizing will be effective in the future. However, there is no certainty. The markets are always changing. Gold is in a strong trend now. Ive known it to be flat and lifeless for years as it moved to being an asset to protect against fear and uncertainty into a conductor of electricity in over-supply. You have no idea whether the worse loss you have ever seen is anything like as large as one you will suffer in the future. The worse run of bad trades you ever saw is only the worse run you have seen. You can be confident a worse run lays ahead. The worse you have had may not have been a particularly bad one, although you may rely on it being so for your future trading survival. It may have been the worse so far but the worse is certainly ahead of you and not behind you remember this. This is often underappreciated. How do you cope with this? How do you use your experience up until now to judge how to position size and money manage in the future? Here is Trevor Tip: The solution is to multiply the historic worse of all your data by a factor which you find acceptable. Take the worse drawdown, the worse string of losses, the worse period under water the worse anything and multiply it by a safety fact. I double it. Its a guess but it does make some allowance for the worse being ahead of you and hopefully it does so sufficiently to give you a long trading life.

References
Fixed ratio position sizing was developed by Ryan Jones in his book The Trading Game, John Wiley & Sons, New York, 1999. Optimal f is covered in Ralph Vinces book Portfolio Management Formulas, John Wiley & Sons, New York, 1990. Kellys formula, as provided by Ralph Vince, Portfolio Management Formulas, John Wiley & Sons, New York, 1990 For details of the Per Cent Volatility technique see Van K. Tharps book Trade Your Way to Financial Freedom, 2nd ed., McGraw-Hill, New York, 2007, pp. 426-8. All books are available from www.betagroup.co.uk

Page | 14 www.betagroup.co.uk BETA Group2011