At the heart of money management is the decision of increasing or decreasing your investment. To illustrate this, imagine you own a store that sells athletic equipment. Because no sport lasts all year, you’d find yourself changing your floor inventory based on which sports are approaching, which are in full swing, and which are ending soon.
When it comes to changing position size, the rule is to increase your position size during favorable market conditions for your product. In your store, you’d have more football equipment on the sales floor during the fall when you know conditions are favorable for that sport. The other side of this rule is to decrease position size during unfavorable conditions. As football season winds down and basketball season begins, the products in your store would decrease inventory to reflect the new season.
Fortunately, in the market there are two seasons: highly predictive and less predictive. You’ll want to increase your position size in highly predictive conditions and decrease your position size in less predictive conditions. Controlling your investment size is key to keeping your losses to a minimum. This, in combination with other elements of money management as emphasized by the Apiary Investment Fund, will ultimately lead to profitable trading!