Today Lesson: Equal Allocation

January 17, 2023

Introduction: Last week, I wrote about the importance of Risk Management and Managing Trade Size. The next important lesson all traders should learn to understand is equal allocation. This refers to putting the same amount of capital into each trade.

Example: If someone were to implement my "Insider Trading" Strategy, they should stay within the parameters of Risk Management and Trade Size, but also determine an "equal amount" to trade. Let's say someone uses a 1:2 risk-to-reward ratio in their "Insider Trading" Strategy, and decides to allocate $1,000 in the first trade, such that their Risk is $250 and their Reward is $500. They gain their Reward, get excited, and decide to allocate $2,000 to another trade. This time, however, their Risk is $500 and their Reward is $1,000. Now, they lose, and their Loss is $500. This gives them a net profit of $0. Their first trade reward of $500 has been eradicated by their second trade loss of $500. This is why keeping an equal and consistent allocation per the strategy is important. over the long run, the trader should experience a net gain if they allocate the same amount of capital into each trade. Otherwise, they may find themselves "doubling down" and taking really big losses.

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