{"id":2933,"date":"2016-01-08T23:18:20","date_gmt":"2016-01-09T04:18:20","guid":{"rendered":"https:\/\/www.optimusfutures.com\/tradeblog\/?p=2933"},"modified":"2016-01-08T23:18:20","modified_gmt":"2016-01-09T04:18:20","slug":"dynamic-position-sizing","status":"publish","type":"post","link":"https:\/\/optimusfutures.com\/blog\/dynamic-position-sizing\/","title":{"rendered":"The Pros and Cons of Dynamic Position Sizing"},"content":{"rendered":"

Money management and position sizing is an area that does not usually receive a lot of attention. Traders generally prefer to look for new indicators or try different entry methods and neglect other areas of their trading. It takes most traders months, and sometimes even years, before they turn towards money management and advanced position sizing techniques.<\/p>\n

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However, for a well-rounded and advanced trading approach, having a thought-out position sizing strategy is very important. Flexible position sizing is used by some of the most successful traders; even in the book series of the Market Wizards, some traders utilize this approach.<\/p>\n

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What is dynamic position sizing?<\/strong><\/h2>\n

Flexible, or dynamic, position sizing describes an approach where the trader adjusts his position size based on the quality of the trade and based on his historic winrate.<\/p>\n

For example, a trader would risk a smaller percentage amount on a setup with a historic winrate of 45% than on a setup with a historic winrate of 65%. This approach has been used in many other areas where the concept of chance applies; and it is common sense that most people would bet more when they have a higher likelihood of winning.<\/p>\n

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The goals of flexible position sizing<\/strong><\/h2>\n

The goal of flexible position sizing is that, although it sounds very obvious, a setup with a lower winrate encounters more and more frequent losses. Thus, if a trader trades multiple setups in the same account, using the same amount of risk on each trade does not account for the variance that will exist.<\/p>\n

If you trade two setups \u2013 one with a winrate of 45% and the other one with a winrate of 65% – the frequent losses of the setup with 45% will eat up your profits from the setup with the higher winrate if you don\u2019t adjust the risk.<\/p>\n

Tip:<\/strong> You have to take the concept of R-multiple<\/a> into account as well. The size of your winners plays a large role in position sizing. A trading system with a low winrate that also has a relatively low R-multiple on winning trades should consider an even smaller position size.<\/p>\n

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Pros of flexible position sizing<\/strong><\/h3>\n