On the subject of bet size, if you plot performance against position size, you get a graph that resembles one of those rightward-facing, high fore-headed cartoon whales. The left side of the graph, corresponding to relatively small position size, is nearly linear; in this range an increase in trading size yields a proportionate increase in performance. But as you increase size beyond this range, the upward slope flattens out; this is because increasingly large drawdowns, which force you to trade smaller, inhibit your ability to come back after strings of losses. The theoretical optimum is reached right about where the whale's blowhole would be. To the right of this optimum, the graph plummets; an average position size only modestly larger than the theoretical optimum gives a negative performance. Trading size is one aspect you don't want to optimize. The optimum comes just before the precipice.

I really REALLY hate to argue with Bill Eckhardt, but I have to disagree with him on this point. Returns don't "plummet" right above optimum. They decrease just a bit quicker than they increase below optimum. This isn't opinion, it's established mathematics.

garyfritz wrote:By the way, even my more aggressive risk levels are lower than what a lot of people trade at. They just look at the return they can get with their bigger betsizes and they're oblivious to the much higher risks they're taking. If you don't know exactly how your system performs, you are playing with fire to take on larger position sizes.

Khalid's approach is MUCH safer if you have not carefully analyzed your system's behavior. Unless you understand how to do the above analysis, and you understand the implications of that analysis, you should stick with Khalid's approach and play it safe.