January 23, 2019

How position size affects your returns ( by Keshav)

Here is the result sheet of a coin toss game. 

Let's say the rules for the game are: (1) we start with $1,000, (2) we always bet that heads come up, (3) we can bet any amount that we have left, (4) if tails comes up, we lose our bet, (5) if heads comes up, we do not lose our bet; instead, we win twice as much as we bet, and (6) the coin is fair and so the probability of heads is 50%. This game is similar to some trading methods.

The result of tossing the coin is same for each bet size. But the returns on your bet varies drastically. 

So what i can conclude from this is, it doesn't matter how well you can catch the lows and highs of the market. Its all in managing your risk and sizing your positions. 

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