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Monday, February 28, 2011

The importance of position sizing (Applicable to the Rolling Stone System)

It is possible to apply a simple rule of thumb to open position using this system. We take the condition 1 and 2 and apply them to the 1H chart. Once the conditions are met, we will open a position which we refer to as the “small position” (we will risk 0,5% of our portfolio on this position). Subsequently, if the position goes in our direction and goes above an immediate previous maximum we will increase the size to a 1% of our portfolio.

When the position has moved in our favor to a point where conditions 1 & 2 are met in the 4H chart, we max the size of our position. We will also assign the stop at below the “low 60 period EMA curve” in the 4H chart which should be above the stops for the small position. The idea is that, even if our trade goes against us in the 4H timeframe we will not lose the small positions and still recover some of the loses. We decrease our total risk considerably by doing this.

Position sizing is a key factor to determine the profitability of a portfolio of trades. Position yourself with small positions in potential trends. Once the trend has confirmed in your favor, increase the position to your pre-defined maximum