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Position Sizing: Fixed Percentage of Current Equity
This fixed percentage of current equity position sizing method is almost similar to the default position sizing. It allocates a certain percentage of the current portfolio equity to new positions. This percentage is calculated by dividing the current portfolio equity by the total number of positions allowed.
That percentage depends on the performance of the portfolio. It increases when the portfolio is making profits and decreases when the portfolio is losing.
There is however a minor difference. This position sizing method makes sure that no position is taken if there are not enough cash to meet the percentage criterion.
Here is an example:
On a particular date, your portfolio equity is 10,000$ and you allowed three maximum positions.
On that date, you already have two positions in the portfolio:
X1 with a size of 4000$ and X2 with a size of 3000$. You have 3000$ in cash.
When a new position is about to be entered, the money management system calculates the amount of money to allocate to that position.
In this example, the new position should be equal to 3333$ (10,000$ / 3).
Using the default position sizing technique, 3000$ are allocated to this position (since this is the amount of cash we have in the portfolio for that day).
However, using this money management technique (Fixed percentage of current equity position) the position is not entered, because there are not enough cash available in the portfolio.
New positions will be rejected until we have enough cash in the portfolio. The cash amount must be higher or equal to the amount that corresponds to the fixed percentage of current equity position.
In this example, a new position will be entered in one of the following cases:
- X1 or X2 position is exited.
- One the open positions loses 1000$ or more. If X1 loses 1000$, the portfolio equity will be equal to 9,000$, and the amount that corresponds to the fixed percentage of current equity position will be equal to 3000$ (9,000$ / 3), which is equal to the amount of cash available in the portfolio.
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