Position sizing
In the previous section, we tested three different exit techniques to control trading risk. While each of the three techniques can work well on single assets, they cannot function as they did when trading a portfolio. A dollar stop is not suitable because different stocks have vastly different prices; a percent-based stop is not suitable because different stocks have different volatility levels, and a volatility-based stop increases the risk toward the most volatile stocks in terms of absolute dollar risk.
Let’s try a different approach to break out of this negative loop: equal dollar risk sizing.
Equal dollar risk sizing is a risk management strategy where you allocate the same amount of money, or dollar amount, to each trade or investment. This means that regardless of the price of the asset, or its volatility, you are risking the same fixed dollar amount on each trade.
In my experience, I’ve found that exit management techniques may require...
