Saturday, August 20, 2005

Risk Management: Position sizing and concentration of trading activity

Simply a trading plan should concentrate the total number of positions held or contracts traded on the most reliable and profitable trade set ups that that trader has used. Considering a much improved set of circumstances such as numerous convergences involved in a single trade, that trade should have a higher number of contracts involved in it than one which shows divergence but is still somewhat likely to produce a profit. The number of contracts traded can be pyramid or dynamic to the opportunity perceived instead of linear.

A Highly profitable reliable trade set up may get 3 or 4 times the number of contracts traded than others not so proven. In this way less is risked on riskier trades, and fewer of those trades should be attempted than the more reliable set ups. Pyramid Volume on a trade and frequency of your most reliable trades whenever possible. This does not mean to add to existing positions, that is a different subject :)