![]() The critical limitation to maximum position size is the number and magnitude of losing trades, but the entire distribution must be taken into account.Įvaluation of risk is very subjective, but it can be quantified. It is important to analyze the entire distribution of returns - not just the mean, or even the mean and standard deviation. ![]() They work best when the distribution of bet returns is stationary (as a roulette wheel) and the amount won equals the amount lost - neither of which is true for trading results.īe wary when applying simplistic position sizing. While it is interesting and potentially helpful to learn about betting systems, such as described by the Kelly formula, those betting / position sizing techniques are applicable to processes / games / systems that have much more stable characteristics than trading. ![]() That bias overestimates profit and underestimates risk. Having Any position sizing, including compounding, in a trading system creates a bias based on the specific sequence of trades encountered during development. That should be done by an analysis of the distribution of the trades. It is not possible for the model to determine what the position size should be. Position sizing depends on the synchronization between the model (logic, rules, and parameters) and the data being processed and traded.
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