Frequently Asked Questions

Dr K Market Direction Model
When there is a buy or sell signal on the MDM, do you position size based on where you have to set your stop-loss on the trade or do you commit a fixed percentage of your account on every trade..

Q: When there is a buy or sell signal on the MDM, do you position size based on where you have to set your stop-loss on the trade or do you commit a fixed percentage of your account on every trade. The reason I ask is because in 2000-2002 and 2008, there were buy/sell signals that called for stops to be set nearly 10% from the buy/sell point.

 

A: In general, stops and percentage allocations are determined by one's own personal risk tolerance levels.

I commit a fixed percentage of my account on each trade, though some may choose to pyramid, especially if in a choppy, trendless environment. That way, one would lose even less.

During parts of 2000-2002 and 2008, volatility was higher so the loss before the model's fail-safe kicked in was higher than 2%. My position sizes were smaller as a consequence of that higher volatility, since I knew that I would have to give the position more room to avoid getting whipped out of the position prematurely.


Published: Jul 27 2011, Modified: Jul 11 2012