Money management system #3 (Lot size management)
Submitted by User on July 16, 2009 - 17:48.
This is another approach to lot size management:
L - loss
W - win
1L - a loss of 1 lot
2W - a win of 2 lots and so on
Lot size management rules:
Rule #1. If you win your first trade in a series, you count it as a win and start a new series;
Rule #2. When you lose, you keep trading the same size until you hit a winner. After one win, you trade equal to the aggregate of the previous losses (example: after 4 losses at 1 lot followed by 1 win at 1 lot, you increase your trading size to the sum of the 4 losses - 4 lots in this example);
Rule #3. If you have a series of losses, one win, then another series of losses, you trade the size of your most recent bet multiplied by the length of the larger losing streak;
(Example 1: after 2 losses at 1 lot, 1 win at 1 lot, 3 losses at 2 lots, and 1 win at 2 lots, you are now betting at 6 lots (3 losses by 2 lots);
Example 2: after 3 losses at 1 lot, 1 win at 1 lot, and 2 losses at two lots, you would trade 6 lots since the current bet size is 2 and the largest losing streak is 3)
A natural result of this system is that there are circumstances where the trader will be breakeven before two consecutive wins. This happens when a second win is achieved within the number of trades equal to the largest losing streak of the series. Example: L L L L W L L W would actually result in a breakeven case.
Again, the biggest danger is a large amount of losses with intermittent wins that aren't consecutive. Example: L L L L W L L L L L L L W translates to trading at 28 lots (streak of 7 losses multiplied by the current trade size of 4) per trade following that second win. Add two losses to this example and you're down 56 lots and still looking for two consecutive wins.
...On the other hand, if a trading system brings so many losers and so little winners, may be it is time to change the system... :)