THE POSITION SIZING AND MM GAME
Make 40 small pieces of paper,on 20 write SUCCESS and on 20 write "FAIL" and fold them and put them in a glass bowl. Then ask a small child in the family to pick up each slip from the bowl and you read whether success or fail.
The sttarting capital is Rs 1,00,000/- and At each trade you will risk 25 % of the capital. If the trade is success,you make double the amount of money risked on a trade and if it is failure,you loose the amount risked on that trade. So for first trade your cum equity balance is Rs 1,00,000/- and the amount risked is 25000/- so if the slip says success,you make 25000*2 =50,000/- and your cum equity is 1,50,000/- now and on next trade you bet 25 % of 1,50,000/-. so go on like this till 40 trades are over.
The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/- Dont believe me ? Try it out. I have spent 3 hrs on this game early in my career and tried coin toss,various sequence of alternate win/loss,10 losses and 10 wins in sequence etc…But the final wealth is same not even a rupee more or rupee less.
What does this prove ? Have a competent system,backtest,have a good mm and trade with confidence. Your sequence of losses and gains make no difference in ultimate results of building your wealth as long as your method has a positive expectancy and edge. Hope you enjoyed the game and learnt something from it…..About expectancy, we will discuss later...
I am no way advocating risking 25% on every trade. This is just illustration because optimal f for this system is 25 %. But 25 % is way tooo high. Start with 1-2 % and put your profits to work for you….
Smart_trade