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RISK ANALYSIS TECHNIQUES FOR TRADERS- The Empirical Techniques

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RISK ANALYSIS TECHNIQUES FOR TRADERS


The Empirical Techniques

DECIDING ON QUANTITY
Whenever you enter a trade, you have made two decisions: Not only have you decided whether to enter long or short, you have also decided upon the quantity to trade in. This decision regarding quantity is always a function of your account equity. If you have a $10,000 account, don't you think you would be leaning into the trade a little if you put on 100 gold contracts? Likewise, if you have a $10 million account, don't you think you'd be a little light if you only put on one gold contract ? Whether we acknowledge it or not, the decision of what quantity to have on for a given trade is inseparable from the level of equity in our account. It is a very fortunate fact for us though that an account will grow the fastest when we trade a fraction of the account on each and every trade-in other words, when we trade a quantity relative to the size of our stake.
However, the quantity decision is not simpl…