Advanced Position Sizing – 3 Steps To Better Risk Management


We hope that after the last session, you now have a better grasp of what the Simulator does. In this lesson, we will get more practice with the Simulator and see how it can help you fine-tune your position sizing.


Performance metrics and trading risk

There are 3 performance metrics that are important when it comes to managing account volatility and risk of drawdowns: the reward:risk ratio, the winrate, and your position size.

Whereas you can’t control the reward:risk ratio and the winrate, you have complete control over the position size. By adjusting your position size you can control how significant drawdowns might be, how much account volatility you are likely to experience in the future and you can also manage account growth much better.

The concept of flexible position sizing and connecting it to the winrate and other parameters of a trading strategy is not groundbreaking and new; it has been around for as long as humans engage in activities where they have to deal with uncertain outcomes and the concept of probabilities. Flexible position sizing is not only used by professionals in the fields of wagering and other games of probability, but the best hedge fund managers and the top traders of the century also follow the concept of flexible position sizing.


The Simulator

The Simulator provides information about a possible equity development scenario which you may expect over the course of your next 500 trades. This gives traders ideas about what to expect, shows them how likely certain drawdowns are and it indicates the impact of account volatility based on their very own, personal trading and performance metrics. You can also use the Edgewonk filters to analyze the potential future performance of specific setups or strategies individually, simulate trades based on Custom Statistics or apply any other filter method.


How to optimize position size with the Edgewonk Simulator

Step 1 – Choose the trading strategy you want to optimize

Select one strategy or setup for which you want to optimize your position sizing.

Tip: It is advisable to optimize position sizes for trading strategies individually to get the best effect. Optimizing position size for several different strategies at once can lead to inconsistent results because the underlying dynamics (such as winrate, risk:reward ratio, etc.) of trading strategies can be very different.


Step 2 – Find the optimal position size

Now you can start changing the parameters for avg winner and loser. Make sure you always change both parameters at the same time to keep the reward:risk ratio constant.

Then keep an eye on how far the different simulated performance graphs deviate. The further the graphs are apart from each other, the more fluctuations and risk you have in your trading strategy.

The risk output metrics always show you 2 different numbers based on the simulated graphs. One analyzes the graph with the highest and one with the lowest performance. That way, you can get a feeling for the volatility and the corridor.


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