V. 19:2 (18-22): Position Sizing With Monte Carlo Simulation by Michael R. Bryant, Ph.D.

Need to know how much to put on your next trade? You can figure it out with 95% reliability using this simulation technique.

Consider this: Jane and Joe started trading the same Standard & Poor’s 500 futures trading system at the same time. They each began with $100,000 and both followed the system exactly. But 12 months later, Joe’s account was worth $200,000, while Jane’s account was worth only $50,000. What was the difference in their trading? Position sizing. As his account equity increased, Joe increased the number of contracts in a near-optimal manner, resulting in a sharp runup in equity. Jane, on the other hand, increased her position size too quickly, so when the inevitable string of losses occurred, her account plunged, leaving her worse off than if she had risked less on each trade.