Equalizing contract risk in trend following

Style comes before the rules

Trend-following is a price-only style that reacts to what the market is doing rather than forecasting. Fundamental news is treated as irrelevant to the decision. The style is chosen first. Systematic rules come after that choice, and the label systems trading is incomplete until the system type is specified.

Five design questions are required: which market to trade, how much to trade, when to enter, when to exit a loser, and when to exit a winner. Answering only the timing question leaves size and market selection unspecified. Starting capital alone is not the decisive success factor, and no starting amount is said to guarantee profits.

One lot is not the same risk in every market

Fixed-contract-sizing takes one contract, or any unchanging lot count, on every signal regardless of account equity, stop distance, or which market is signaling. One-contract-per-signal testing applies that same size to a small account and a large account. For the larger account this is a different, heavily under-levered procedure.

A fixed dollar stop, and even a stop that varies with a market-condition parameter, still does not by itself set how many contracts to hold against a chosen risk budget.

In a $50,000 hypothetical book, one contract each assigned $1,500 of risk to Treasury bond futures versus $500 corn, $325 Exxon single-stock futures, $425 Yahoo single-stock futures, and $250 eurodollar futures. Risk concentrates in the bond line.

Equalizing the book

Unit-risk is the dollar amount at stake on one contract from entry to stop. Volatility-position-sizing scales the contract count from account equity, stop distance, and a chosen exposure so each market's loss unit is bounded before entry and kept aligned while the position is open.

Risk-equalization raises or lowers contract counts so each market's total dollar risk matches the largest unit-risk in the book. Contract counts can be scaled by dividing each market's dollar risk into the largest unit risk and rounding down, producing 3 corn, 1 bond, 4 Exxon, 3 Yahoo, and 6 eurodollar contracts so each line sits near the same dollar risk.

Why the unit stays small

The historical workflow keeps that unit dollar risk a small share of equity, illustrated as perhaps 2 to 5 percent, so a worst-case sequence still leaves capital to re-enter. A drawdown-period is an account stretch driven by trendless or violently two-way markets that taxes discipline even when the entry rules are unchanged.

In the illustrated arithmetic, equalizing contract risk changed a three-of-five win pattern from a $312.50 one-lot loss to a $3,675 gain, and a two-of-five win pattern from a $1,562.50 one-lot loss to a $75 loss, when winners were held at 1.50 times initial risk. Those figures compare the same win and loss counts under two sizing rules.