Managing Position Size Depending on Asset Price Characteristics

Abstract

The application of a technical trading rule requires investors to determine a position size of the trades selected. In order to find an optimal position size, the Kelly criterion is widely suggested, which bets relative fractions from the remaining trading budget. Therefore, the general impact of position sizing on timing strategies and the relation to the Kelly criterion have been analyzed. The introduction of relative position sizing has a major impact on trading results. In contrast to a standard Kelly framework, however, an optimal position size does not exist.

Keywords: Kelly Criterion; Money Management; Parametric Simulation; Position Sizing; Technical Trading; Timing Strategy

JEL Classification: G11