Q: In re-reading  Trade Your Way To Financial Freedom (First Edition) for the workshop next week I’ve come across something I don’t understand and would like some clarity for my trading.  I’m re-reading the bias section several times so I can understand them better to try and eliminate as many as possible when I get into my system design!

It seems that randomness is used to argue against investing more during a losing streak but in the second paragraph on page 38 you state, “When you understand what’s involved in winning, as do professional gamblers, you’ll tend to bet more during a winning streak and less during a losing streak. ”This seems to be saying that you should bet more during a winning streak. But I thought the whole point is randomness, which again is used against betting more while losing. If that is the case you can’t have it both ways. So if everything is not predictable and understandable and if these are just unjustifiable casual relationships where no patterns exist, then why would we change our investment/wager amounts during any streak, up or down?

Is it advisable to increase wagers/investments after winning and decrease after losing if in fact most moves are random moves over the short term?

Thanks. Best regards, Joe

A: I tend to distinguish price randomness as noise from any underlying price trend. You need to figure out for yourself how much randomness exists in prices and how you deal with that. Regardless, using the percentage risk method of position sizing, you risk a percentage of your equity— say 1%. During a winning streak your equity goes up and during a losing streak your equity goes down. In either case, however, you still risk 1% of your equity. When your equity is higher, the dollar amount of that 1% will be higher and when your equity is lower, your dollar amount risked will also be lower. Good position sizing helps you earn more with winning trades/streaks and lose less with losing trades/streaks. There are many more sophisticated position sizing methods that can accelerate your equity gains as well as put a brake on equity losses covered in The Definitive Guide to Position Sizing. Starting out though, percent equity position sizing can work quite well. — Van