Pegasus Position Sizing Strategies

For Accounts over $50,000

The term “Money Management” can be confusing to some. It actually deals with Position Sizing. The Pegasus system will tell you the “when”, i.e. when to buy, when to sell, when to enter, when to exit. It will even compute and tell you the estimated risk per trade which you will use for Position Sizing purposes. That is automatically handled for you by the system. This section, however, deals with the “how much”, i.e. how many contracts to trade. So far we have been showing sample portfolios all based on single contracts per trade. If you are trading a large size account (over $50,000), you should implement a Position Sizing strategy (Money Management strategy) to begin to trade multiple contracts per trade. This will grow your account exponentially instead of linearly.

To better understand this lets begin with the following example. Suppose you manage to invest $10,000 at 30% simple interest per year over 20 years. You will hence receive $3000 per year (30% of 10,000). After 20 years your account is now at $70,000 (60,000 accumulated in simple interest plus the original investment of 10,000). So you have gone from $10K to $70K – you have grown your account 7 fold. Not bad. This is the equivalent of trading single contracts. If you think this is good you are missing the boat.

Now suppose you invest the same $10,000 at the same 30% for the same 20 year but now you compound your returns instead. This means that as your account grows you will re-invest the profits. After the same 20 years you will end up with $1.9 Million! You have grown your account 190 fold! This is not magic – its mathematics. You invested the exact same startup capital in the exact same investment over the exact same time period. The difference here is that you compounded your returns. The difference in results is dramatic. Furthermore, you did not increase your risk in any way. You had your money in the same place and invested it in the same investment. What changed here was only the “how much” you invested every year. This is the equivalent of trading with Position Sizing.

So now lets look at an example using Pegasus. Using the Pegasus Large Size 18 market portfolio presented on this website, recall from our single contract example that our net profits came out to $873,175. Adding $50,000 starting account equity this means that we grew our account from $50,000 to $923,175, i.e. almost $1 Million. While this is fine for single contracts, what would our returns be if we applied position sizing (money management) to trade multiple contracts, and thus compound our returns and grow our equity exponentially instead of linearly? The file “Pegasus Large MM Daily Equity.xls” shows what would have happened if we did this.

Click here to view or download the Pegasus Large MM Daily Equity.xls file in Microsoft Excel spreadsheet format.

As you can see from the file, when applying position sizing we grew our $50,000 account to almost $36 Million! Again, this is not magic – its mathematics. We applied the exact same system under the exact same conditions. The only difference is that we now applied a Position Sizing technique to grow the account exponentially. Notice how the single contract file grows in a linear (constant) manner while the second one grows in an exponential (compounded) manner.

And what about risk? Did we increase our risk? Actually we reduced it! Between $50,000 and $1 Million we applied a 2% formula of our equity on any trade and once we were above $1 Million we actually lowered our risk even more to no more than 1% per trade. If you were at $100,000 and took a trade whose risk was at the limit of $3000 that means a 3% risk. If your account is at $30,000 and you take a trade whose risk is $3000 that’s a 10% risk. Here we are talking about 2% and then 1% risk, yet we grow our account much faster.

Note: in our position sizing (multi-contract) tests we deducted $100 per trade per contract.

For a detailed explanation on Position Sizing techniques such as the one presented here, please see the manual "Pegasus Portfolios & Performance".

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