Position Sizing for Practitioners [Part 2: Dealing with Drawdown]

The Problem with Optimal f

What does “optimal” mean, anyway? In the first part of this series, we discovered that the staked fraction of capital that yields the greatest compounded returns also yields a less-than-optimal level of drawdown.  To realize the greatest return on capital, an investor in SPY since its inception should have used over 3x leverage to buy in. This would have yielded the greatest compounded rate of return, but would have induced a 97% (!!!) max drawdown along the way. Since a 20% retracement from peak equity causes most investors to start tossing in their sleep, this approach doesn’t seem very realistic. This post will help traders maximize their gains while still getting their beauty rest!

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Position Sizing for Practitioners [Part 1: Beyond Kelly]

Background

Albert Einstein once proclaimed that “compound interest is the eighth wonder of the world” (allegedly, at least; people attribute all kinds of sayings to that guy). Let’s just assume that he did. This is the single most important reason why people participate in the markets. The magic of compounding interest turns time into an exponential money multiplier, and the greater the rate the more dramatic the results. This is the single most important concept that traders need to understand.

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Volume and Volatility: A Tale of Two Vols

Background

Outside of price action, two of the most popular market characteristics analyzed are volume and volatility. Volatility is often used to determine market regime, while the traditional use for volume is to confirm price movement.  This post will investigate the relationship between these two characteristics, and whether using both of them may be redundant.

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