Money Management


An aspect of trading that is highly neglected is the one dealing with Money Management. We could write more than a book on this topic, so if you are interested in the topic and its implications, take a look at our huge bibliography. What we want to focus on here are two aspects which we think are essential: the rules of entry and the rules of exit.


Money management and the Rules of Entry: Sizing-in

Unlike Fixed-Shares logics (every entry signal implies the negotiation of a constant, pre-determined quantity of shares) and the Fixed-Amount ones (every entry signal implies the negotiation of an equivalent value always in equal value) in this strategy the quantity of shares to be negotiated at every opening signal is never the same. It is actually the fruit of a patented algorithm which keeps account of the expected risk on a scale from 1 to 100.



The yellow indicator in the above chart stands for the amount of the share in our portfolio day after day (that is, the open quantity) and the red-rounded numbers the traded quantity at the opening of every signal. In other words, as we can visually see, we calibrate the monetary exposition to the various signals, on the basis of an indicator which estimates the expected volatility and therefore the forecast risk. Systems looking for volatility (breakouts) will be more exposed when an increase in volatility is estimated; vice versa, reversal systems, which is breeding ground for trendless conditions, will see an increase of position sizing when low volatility is forecast.
Adopting these simple position sizing rules leads to an improvement of linearity, rather than an increase in profitability, which often suffers from that. This is an extremely important aspect because our operative philosophy favors a minor riskiness with a better linearity to performing but frenetic results.


Money Management and the Rules of Exit: Sizing-out

For the closing of every signal there can be two scenarios: total liquidation of the position or a two-step exit. This simple rule of money management is a very precious one, not for a better overall performance but for a stabilization of the final equity line. It is demonstrated how adopting such arrangements may reduce the volatility of the equity line with regard to the alternative of a constant one-time exit.
We opted for the two-step fractioned exit, in order not to make the negotiation fees on profitability too expensive (especially if they have a fixed, non-variable amount, as it happens for almost all brokers).
The Money Management chapter is constantly evolving and can be easily and profitably customized. This is why the strategies we are currently developing and that will be published online will take these new changes duly into account, for an overall improvement of our portfolio.


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