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(.01 x Account Size) / (AvgTrueRange(20) * BigPointValue)
In this case I have set the account size to $30,000 -- small by some
standards, however many retail traders start with much less (ie $5000).
This formula assumes you are trading a portfolio and want to equalize the
risk across all markets traded -- ie you want the average daily dollar
fluctuation of all positions to be equal at roughly 1% of your account.
Note that, in this example, even with a $30,000 account size, the formula
would call for a "position" size of 1/3 to 9/10 of one T-bond contract. If
you run this on coffee, it will sometimes call for 1/10 of a contract,
similar with S&P.
Just food for thought.
David
PS. I am not saying this is the only bet sizing formula out there or
anything else people may accuse me of saying...just that this is one
example of a conservative formula used by some legendary traders we all know of.
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