Money Management Research: Harmonizing Position Size and Time into Your Strategy

[JTL]

While finding a neat indicator in the forum I saw a message that i haven't had any interaction on the site in a while. So i decided to post some information that I learned to implement into my trading. Thank's again to all the coders who've built indicators and showed me how to modify code.

The following applies to short term systems.

As of this writing i have not learned to use Fibonacci time zones successfully. What i have learned is prices move in cycles and the character of prices move in cycles. If you study your market you can often see the changes and trade accordingly.

When you have created a profitable system and all of a sudden it stops working, most time's it's because you are not trading in the environment for which the system was created. That's assuming you are following the system as before and trading the pair it was researched with.

It's often tough to identify the environment ahead of time. In hindsight it's easy to pick out trends and channels, yet your first loss can often give a clue of an environment shift. When that first loss happens, look at your data and make sure first that you were following your system as prescribed.

If everything checks out, take a look at the charts. Most likely one of the following has changed; the average true range for the time frame you trade, the pair is consolidating, changing to a trend character, or changing to a channel character.

I won't go into those definitions here as you can easily find the answers by googling the net. What's important to look at next is how long the market keeps it's new character. To find out, at your next trigger to trade, look at how much time has passed since your last loss.

If it's abnormal, take the trade with a reduced position size, or pass on the trade and wait about half a session to check again. Your session time will be determined by how often you look for trades and take moves. If it's 24hours, start your research with a base of 4-6hours. If it's 4 hours during say the London session, divide the time you have left in the session and check after half of it has passed.

What you will find after research is a good idea of when and how long to sit back before taking or evaluating another alert from your system. Once you recognize the environment shift, stand aside and set a alarm to remind you to check again later. Don't check before this time as it may be tempting to re-enter prematurely.

In the beginning you will likely miss out on some profitable trades, but as you improve you will greatly reduce or even eliminate that number. Properly done, you will drastically reduce your losses while maintaining or increasing your number of profitable trades.

Test different time periods to wait with. Based on your trading style and time frame you may find that you should wait a longer or shorter period of time than what I've described above. For most systems once you find a good time you will not need to change it.

The only instances where I've seen it may be desirable to change it is when major announcements are coming up or when one of the currency's you are trading is in holiday. In those cases I recommend staying aside until the holiday is over or the news has been released.

Depending on your win/loss ratio, you may have more losses before accurately defining the environment shift. If this is true, try cutting your position size by 25 percent or more after each loss. When you win, increase the leverage back to normal.

If your win streaks are high then you will preserve your capital during losses at a greater rate than normal. Don't worry about the 1 or 2 trades that are massive winners at lower leverage than you would like. The goal is to preserve capital until the market returns to the environment for which your system was created.

Best regards,

J. Travis Lindsey