How much should you put in?

The bet that fits the miss

A thousand dollars through ten misses in a row, twice. Losing one part in a hundred each time leaves about nine hundred; losing twenty parts in a hundred each time leaves about a hundred.

Once you know where your stop is, you know something most people never work out: how much you lose if you are wrong. It is the distance from what you paid to the stop, times how many shares you hold. That amount is the risk.

So the question "how much should I put in?" turns around. Start from the miss instead of the hope. Pick the most you are willing to lose on this one idea, then buy only as many shares as keep the miss to that amount. Some people choose one part in a hundred of the whole, some choose more; the figure is yours to pick, and the next lines show why it matters. Working it out this way is sizing.

Why so small? Because misses come in runs, and nobody knows when a run starts. Ten misses in a row at one part in a hundred leave you about nine-tenths of what you had. Ten in a row at twenty parts in a hundred leave about a tenth. The ideas could be identical; only the sizing differs.

The amount you put at risk on an idea gets a name of its own, R, so results can be counted in it. A target twice as far as the stop is a 2R target: reach it, and you win twice what a miss would have cost.

Said with a food truck

You have a thousand dollars set aside for slips, and you decide no single idea may cost you more than twenty of it. A slip is sixty-five, and the note on the back says you sell at fifty-eight: seven dollars lost per slip if you are wrong.

Twenty divided by seven is not quite three, so you buy two slips, not ten. If winter comes and the note says sell, you lose fourteen dollars and still have nearly the whole thousand for the next idea. Ten slips on the same idea, and the same winter costs you seventy.

That is step eight. One step left: the wall every honest teacher ends at.

Nothing here is advice. The whole ladder is on one page; the app behind it is free to start - the door opens to any address. Education only. Pumpstradamus is a paper trading app: no real money is traded, and we are not a broker or an adviser.