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1993issue C031

Heat first, then contract count on a weekly close-only breakout

Heat is the book-wide risk budget taken from account equity. The archive split that budget into an instrument allocation and then divided by three-week entry risk so a weekly close-only range breakout was sized by stop distance, not by a fixed lot.

  • Heat is set first as a fraction of account equity and is split across the instruments in the book before any contract count is taken.
  • Instrument allocation is that share of the heat budget. Contract count is that allocation divided by entry risk at the three-week risk point.
  • The weekly-range-breakout entered and exited with close-only stops placed two ticks beyond weekly-updated price boxes.
  • The twenty-week and three-week box lengths were chosen to keep a heat-testing illustration simple, not as a finished procedure.
Entries in this reading3 entries
Close-only stop4 readingsCurrent trackVolatility position sizing57 readingsBreakout system93 readings

A chain that finishes before the fill

The archive demonstration treated heat as a pre-trade arithmetic chain. Heat was the fraction of account equity treated as the total risk budget. That budget was split across the instruments in the book before any contract count was taken.

Only after that split was a contract count taken from the three-week entry risk. Position size was therefore bounded by stop distance rather than by a fixed lot.

The weekly close-only breakout

The demonstration book specified five markets, soybean oil, live cattle, sugar, gold, and Swiss francs, over the window from 19 December 1979 through 28 January 1992.

Entries were defined as a close-only stop placed two ticks beyond a twenty-week price range that was updated each week. Exits were defined as a stop placed two ticks beyond a three-week price range that was also updated each week. A close-only stop is eligible only on a closing print. The archive used that stop both to enter beyond the twenty-week range and to leave beyond the three-week range.

Those two boxes describe a weekly-range-breakout: a single testable procedure that buys or sells two ticks beyond a price box that is recalculated each week and holds until the shorter box is broken.

Heat, instrument allocation, and contract count

The cash assigned at entry equaled account equity times a chosen heat fraction, then divided by the number of instruments in the book. That cash is the instrument allocation: the amount assigned to one market before any contract count is taken.

Entry risk is the dollar distance from the intended fill to the three-week risk point at the moment a signal appears. Contract count equaled that instrument-level allocation divided by the dollar entry risk implied by the three-week risk point at the time of the signal.

With equity of 100000, heat of 10 percent, and two instruments, the worked example produced a 5000 allocation and two contracts when the three-week risk was 2500 per contract.

Chosen to keep the test simple

The twenty-week and three-week box lengths were chosen to keep a heat-testing illustration simple, not as a finished procedure offered for later use.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
3 of 25 in the Volatility position sizing track
19941-12 pp.Next on Volatility position sizingShared sigma for trend entries, retests and stopsA mechanical trading system is a written take-or-skip sequence that names the next order, states a risk bound and leaves a record that can be scored after the trade.
All readings on this track · 25 readings
  1. 1988Two-sided optimization for volatility-scaled breakout rules
  2. 1990Weekly range volatility as a tactical regime filter
  3. 1993Heat first, then contract count on a weekly close-only breakout
  4. 1994Shared sigma for trend entries, retests and stops
  5. 1995The promised result as one testable trading procedure
  6. 2001Convert a survival ceiling into a volatility filter
  7. 2002Bound the next loss before the bear trade
  8. 2004Dollar-loss tolerance versus percent-of-equity stops
  9. 2004Bounded risk before entry: stop, size, and leverage
  10. 2006Position sizing as the pre-trade bound on loss and exposure
  11. 2006A trend-regime matrix for volatility position sizing
  12. 2011A premarket range checklist for opening-hour breakouts
  13. 2011Stop-defined share count on a clustered intraday short
  14. 2012Mechanical system design with strategy, signals, and size
  15. 2012Precommit size before a one-day policy shock
  16. 2013R-multiple expectancy, drawdown, and volatility position sizing
  17. 2014Constructing trend-aware slope-divergence rules
  18. 2014Pretrade drawdown fences and volatility sizing
  19. 2015Convert pip value into cash before a forex lot size is chosen
  20. 2016Expectancy as an execution skill rather than a backtest score
  21. 2017Volatility parity equalizes the ticket; implied volatility is a regime dial
  22. 2018Wide-range breakout rules from chart volatility
  23. 2019A structure-based stop, then resize or pass
  24. 2020A cash rule that zeros a trend book on extreme volatility and a short losing window
  25. 2025R-multiples before you size up
By fieldSizing and leverage109 readingsBy year1993106 readings
All 57 readings tagged Volatility position sizing
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