Refining your risk budget
A bit of finesse in the money management algorithm goes a long way. This leads us to small refinements in risk budget such as amortization and false positives.
Risk amortization
"Pyramiding instructions appear on a dollar bill. Add smaller and smaller on the way up. Keep your eyes open at the top."
– Ed Seykota
The short side has a unique set of challenges. Successful shorts shrink. Positions need to be periodically topped up. Adding to an existing position is called pyramiding. Pyramiding is a delicate business.
On the one hand, trends mature. The probability of reversal increases with the passage of time. Risk per trade should therefore be reduced with each additional position. On the other hand, news flow deterioration validates the original bearish stance. Market participants are often tempted to sizably increase their bets. In my personal experience, every time market commentators start to agree with...
