Most people buy and hope for the best. That's not how we should work if we are going to work with short-term strategies and take trading seriously.

This article is for advanced market participants who trade actively, use stop losses, and intend to be more systematic with their position management. What is described in the article has nothing to do with our model portfolios that are rebalanced once a month.

The conditions end after we take a position

After we take a position, conditions will change. The value of the position may have risen or fallen, and volatility may have increased or decreased. We must adapt to these changes. If we do not, we risk having random risk exposure in different positions, which may result in us not utilizing the full potential of the strategy.

The basic principle of trend-following strategies is to reduce risk in losing positions and increase risk in those that are profitable.

Position calculator

In the platform we have a position calculator where we can calculate how many shares or contracts we should initially buy. The same calculator is used when we review the position and rebalance.

The position calculator is based on

• Risk to capital
• Capital volatility
• % size of capital

Based on the risk preferences we specify, the calculator will calculate the number of shares we should buy. If you do not want to take into account the volatility of the capital or the percentage size of the capital, you can choose to ignore these factors. Perhaps you prefer to allow for higher volatility, or you want to keep it at a level that provides an easier and more stable journey towards the goal.

How we manage risk is an individual matter, but the most important thing is that we do it in a systematic way.

Increase risk in winners

Most hobby traders make the mistake of increasing risk in losing positions and decreasing risk in winning positions. This is also one of the reasons why many of them lose money. We are going to do the exact opposite – increasing risk in winning positions and decreasing it in losing ones. This means that we adjust our risk parameters upwards in the calculator when we rebalance a winning position. You could say that we are “gambling” a little with the profit, but in a systematic and strategic way.

In the video, I reveal how you can use the position calculator to maximize your control over both positions and returns.

Click here to download a PDF with more information about the position calculator.

Best regards,
Erik Martin Hansen