When rule-based trading data is gathered and collated, it will show there are times when the account will go into drawdown and other times where the capital will increase.
By using an active position sizing method, the drawdown period should not draw down the trading account to a point where taking the next position becomes a fearful choice.
When rule-based systems are developed, the data may show statistics around not only the win-loss ratio, but also other observations like the number of wins or losses in a row.
With a money management system in place, the account will be able to withstand these drawdown periods without concern.
The power of compounding returns
The guideline for money management is to only put a certain percentage of the account at risk in the market. The win-loss ratio and the statistical profile of the rule-based system will then take care of the outcome.
Using a rule-based system and a time frame, with stop losses and robust money management, gives us a different perspective on trading.
We’re now adhering to a trading plan that’s very much like a business plan.
It removes the need to constantly search for a trade entry and brings it all down to a mechanical methodology.
As the rule-based trading account grows, the natural forces of compounding then come into play.
This means your returns become magnified by the capital generated from past trades.