In this lesson, we will discuss position management. To achieve continuous and stable profits, with small losses and large gains, position management is the most core foundation.
As shown, when we use the same strategy to trade in the same market, we can have a hundredfold difference in returns.
📖The only difference lies in the different position management.
It's very simple. If we participate in a guessing game, where guessing correctly doubles our bet and guessing incorrectly loses our bet, how should we control each bet amount X to maximize profits?
Can we earn the money sent by the game? In fact, upon careful consideration, it is not difficult to find that the essence of making money lies in how we place our bets. Suppose our betting position each time is x, total profit is y, correct guesses are n, and wrong guesses are m, then we can derive the following formula yᵢ₊₁ = yᵢ (1 + 2x)ⁿ (1 - x)ᵐ. Simplifying further, if we assume our correct guess win rate is 50%, then both n and m can be considered as 1 time, which transforms into the quadratic equation we are most familiar with.
Continuing the derivation will yield a formula more suitable for the trading market, which is the famous Kelly formula:
y = ∏ (1 + bᵢx)ᵖⁱ, where b is the profit rate and p is the probability.
📌However, in the actual trading process, we need to face:
I will update how to manage positions in different trading stages based on this in the future.
I hope this article can be of use to you. When you consciously learn about position management, you officially step into trading. I will periodically update small lessons related to trading.
