Several of you responded to yesterday’s post about the different position sizing approaches I use.
Here’s a nice visual I put together to see the difference in one of my strategies.
This is the pre-optimized version of the strategy, before putting it through the Strategy Cruncher.
Both the green and the red lines have the same trades, but with only a single difference.
The green line is using position sizing based on the distance to the stop price.
The red line is using a constant share size.
Which equity curve would you rather use as your starting point?
Why are the lines so different? Two reasons:
- The stop price is selected based on recent price action
- The sizing is based on the distance to the stop
You can see how this approach incorporates sizing at a fundamental level – it’s baked into the strategy itself.
The strategy doesn’t really make sense without this sizing.
Choosing the right position sizing approach will make or break your strategy.
If you’re bolting it on at the end as an afterthought, it’s unlikely to be good enough.
-Dave
