Lesson 1.

1
Introduction to the Dynamic Position Sizing (DPS)

Tomas: Welcome to the Dynamic Position Sizing Programme, which is a programme

for advanced traders.

Here is Tomas, and we will go through the Module Number 1, which is Intro-
duction to The Dynamic Position Sizing Approach.

First, a short disclaimer here. As you already know it, trading involves a sub-
stantial risk of loss and is not suitable for all investors. Past performance is
not necessarily indicative of future results.

Okay, so I'm very, very excited for you - very excited that you have decided to
follow and join the Dynamic Position Sizing Programme. I really and very, very
honestly believe that you will benefit from this programme tremendously be-
cause dynamic position sizing, it's been a true breakthrough for me. It's a
completely cutting-edge technique that we use in our hedge fund as well,
and I think that once you implement dynamic position sizing to your existing
trading strategies, for example, into the strategies that you have built with
the Breakout Strategies Masterclass, you will see some amazing results very,
very, very fast.

So what is dynamic position sizing, and why do you actually need it?

As I already mentioned, it is a technique that we developed for our hedge

fund, and it is one of the key reasons behind our success.

Of course, the other part is the quality of the strategies that we use, the
breakout strategies that we have developed, exactly as I teach the frame-
work in the Breakout Strategies Masterclass. But this next step, this imple-
mentation of dynamic position sizing, I think that's another key factor behind
our success.

The key promise here is very simple. The probability of your trade being prof-
itable is never constant. That's very important to understand here at the very
beginning. Although you have some average probability of your win, of trade

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 being profitable, it is never constant. It constantly fluctuates. So in back-test
reports, we look at some averages, but what if we look deeper into these av-
erages?

What if we are not satisfied - just see some average, some number, and we
start digging deeper?

Which is actually what we did on in our hedge fund.

And in that case, you will see that the probability fluctuates, and sometimes
quite significantly. So let's say that you have some average win per cent,
which can be, let's say, 60%, but sometimes it can be just 35%, and some-
times it can be even up to 75%. So it really, really fluctuates.

So the question is: How wise would it be to increase our position size on days
with higher probability, and decrease the position size on days with lower
probability?

Which is basically the key concept behind dynamic position sizing.

We will be changing our position sizing based on our probability, so if we

have lower probabilities of success, we will decrease our position, and if we
have higher probabilities of success, we will increase our position.

And after completing this programme, you'll be asking, literally, how could
you have lived without dynamic position sizing for so long?

I promise you that.

For me, there's this a cutting-edge concept. I know that for many traders, it
can be too new, but we spent a lot of time with this approach, with this con-
cept. We do a lot of different stuff in our hedge fund, and it really is an awe-
some and very, very beneficial concept.

So what are the key advantages of dynamic position sizing?

It's very easy and fast to implement with your existing trading strategies.
You'll see, after this course, after this programme, you'll be able to use the
smart code, and implement it, literally, within a couple of minutes.

Very, very simple and fast to implement.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 And you will see immediate, tangible results. You don't need to wait for any-
thing, you don't need to create anything else, you'll see immediately big -
hopefully with more strategies - big improvements with some - not with all
strategies - let's be honest here.

Not all your strategies must be necessarily improved or significantly im-

proved, but most strategies will be; and, with some techniques, really dra-
matically.

This is a proven technique in live trading with my hedge fund. We've been
running the hedge fund for about one year now. Actually, it will be very, very
soon. In a couple of weeks it will be one year, and we've been using this ap-
proach of dynamic position sizing since the very beginning.

And that's plenty of time, or from my perception, it's enough time to prove
this concept in live trading. So you're definitely going to implement some-
thing that works and has been verified.

It can improve the most desired metric, a trading metric, which is the Net
Profit/Max Drawdown ratio.

That's what we aim for mainly. We want to see as high net profit versus max
drawdown ratio as possible and, again, sometimes you will see really dra-
matic improvements.

And it definitely will be for you, much smarter and much more efficient than
usual static position sizing approaches.

This is a new way of thinking, out-of-box thinking, and it definitely will be,
you'll see yourself, that it will be much more efficient and smarter.

Okay, so considerations when implementing dynamic position sizing.

First of all, it's an advanced approach.

You need to have robust trading strategies to work with already. So if you
don't have any strategies yet, this is not a strategy building course; it will not
probably help you much without strategies. But if you're at least working on
some strategies right now, for example, with the Breakout Strategies Master-
class, then as soon as you finish even your very, very first strategy, you will be
already able to benefit from this programme.

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 You definitely need some knowledge of working in EasyLanguage and in
TradeStation.

This is an advanced programme, so I assume that you already went at least

through the Masterclass, Breakout Masterclass, and you understand what to
do, how to do it.

You don't need to really be a super user or know everything, but at least
some basics and orientation, and you need to be a little bit capable of doing
some small stuff in EasyLanguage, to be able to use discourse easily and
properly.

And also, because it's a little bit more advanced course, I will go a little bit
faster and I will be also a little bit more direct than with my beginner's
courses.

Also, you need to be careful with your margins.

For example, if you trade up to three contracts instead of one with dynamic
position sizing, always make sure you have enough money in your trading ac-
count to cover the minimum margin requirements. I assume for most of you,
should not be a big deal, but always check. Check with your broker what the
margin on your market is, and make sure that you have sufficient trading ac-
count to cover margins with up to three contracts, or whatever the number
will be for you.

Okay, so let's talk more about the dynamic position sizing concept.

So when we talk about the concept, we need to understand that, in markets,

there are always certain conditions that have a significant impact on the
probability of your next trade. You already know that conceptually what we
will do, we will be actually taking advantage of the fluctuation of our proba-
bilities of a trade being a winning trade, and this probability is always im-
pacted by some certain conditions, or sometimes I like calling them circum-
stances or occurrences.

So normally you could use some of them to create an extra strategy filter.
That's logical if you know that there are some conditions that really can
change or significantly impact the probability of your next trade, then nor-
mally, you would consider using them as an extra filter.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 But, very important, filters are not always a good solution for many, many
reasons.

For example, more strategy filters increase the danger of overfitting.

That’s absolutely for sure.

So we don't really want to use many filters in our strategies. We want to have
some reasonable number of filters, otherwise the danger of overfitting will
really increase significantly.

And also, many filters get rid of a lot of great trades too. That's another thing.
Filters, they don't only get rid of bad trades, but also they get rid of a lot of
good trades.

And, more importantly, you always need a good sample size of your trades to
have some good statistical validity. I prefer at least hundreds and hundreds
of trades, as you already know from my Breakout Strategies Masterclass.

And if you start implementing more and more filters, your sample size can go
drastically down, and you will not have enough statistical validity for your
back-test. So that's also very important to understand.

So that's why dynamic position sizing can really use certain conditions and
occurrences which will be a quite a lot in your advantage but, at the same
time, we will not lose, or we will not put into danger, all these important
points that I have just explained to you.

Let me explain the concept a little bit further with a simple example of day-
of-week, which can have a big impact on your strategy probability.

Okay, so for sake of this experiment, or this conceptual explanation, I have

prepared a short code.

This code, you will find it within this Module Number 1, as a DPS-Introduc-
tion-Dow-test.

And what we are going to do, we are just going to see how differently can
market behave on different day of week, because each day of week has got a
different statistical probability when it comes to possible movement.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 So definitely, at least with indexes, but with many other markets as well, you
have some days of week which will be very strongly biased towards growth,
towards a bull market; and then you have days of weeks which will have
much stronger probability being good days for short strategies, because they
will be a little bit more biased towards declining, market declines, and sell
offs, and just bear market.

So this is not actually what we're going to use as a dynamic position sizing
technique, because I'll share with you way better techniques, but this is a
very, very good explanation of the concept. This is a good way how to explain
to you how we can really scope probabilities.

Okay, so let me go to TradeStation now and show you in TradeStation.

So, as I said, here we have a short code which will help us to see the behav-
iour of markets on certain day-of-week when it comes to growth or declines.

So what we're going to do, we're going to test what would happen if we
would buy each day, on different days of weeks - on Monday, Tuesday,
Wednesday, Thursday, Friday - and exit at the same day. So we will basically
buy on open, or enter on open and exit on close. And we will test different
days-of-week and we will test different, the long and short.

Actually, the code works like this. If today is, let's say, Friday, then next trad-
ing day, which would be Monday, we buy at open.

We need to always place the order one day ahead.

Or, actually, today we placed an order for one day ahead. So that's why we
do it like this in the code, and we test then what would happen on each day
for long and short position - how dramatically can the market be on different
days?

So let me show you directly in chart.

This is DPS Module 1 workspace, which you have in this module.

And here, I have a strategy - the DOW test; and we're going to test long and
short; and we're going to test Monday to Friday.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 Okay, and if we optimise this, which is going to be very quick, it's just 10 iter-
ations, we will see that we have significantly different probabilities on differ-
ent days.

So zero is long buying.

So, for example, we can see that on Day Number 5, which is actually Monday
because we placed the order for the next day, on number 5 on Friday, so it's
Monday.

On Monday, in general, markets go down. So our probability, if we have a

long strategy, the probability of success of this strategy on Monday is really,
really poor. It probably will be loser.

On the other hand, if we have a look at short position, we have probability

that the market will go up.

We have definitely stronger probability for markets going up than going

down for Monday.

5 means Friday because we always have to place the order for the next fol-
lowing day, so on Friday we say by next daily bar, which would be a Monday.

So that alone already says if we have an index strategy on YM E-mini Dow

Jones, then we definitely should decrease our long position on Monday be-
cause we see that on Monday, it can be very, very poor day.

On the other hand, Tuesday is extremely powerful for long trades.

Number 1 means Monday, but on Monday we're placing the order for the fol-
lowing day, which would be Tuesday. So we're talking about Tuesday, and
Tuesday have tendencies to result in very, very strong up days.

That means bull days or buying days. Days when market grow - when markets
go up.

And that means we definitely could consider doubling our position here.

So what we actually did here, we explored some basic probabilities of mar-

kets and our trades and we, in general, can say, okay, these three days we
would have our normal position size, let's say one contract.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 On this day, two contracts. Let's say this would be two contracts.

On this day, we would cut our position to half, to one contract.

And on this day, we would double our position, and we would trade three
contracts because the probability or the overall market power is on our side
on this day much more.

And, of course, we can do the same with short, although it's a little bit more
complicated on shorts as you can see.

But, at least for long, we could definitely use dynamic position sizing client
days, which is the concept. We're not going to use day of weeks. I'll show
you much better, much more powerful ways to explore and use dynamic po-
sition sizing, but just to understand this concept, this is a perfect, perfect ex-
ample to explain to you how it works.

Okay, so we have some normal days which would be two contracts; poor
days, which would be one contract or even zero; and strong days when we
would double the position.

So I hope that you understand the concept now, and let's get back to the
presentation.

So here again, the result.

So, as you can see, just day of week can make a huge, huge difference, and
you could see that a huge one, we could have completely losing days, as well
as super winning days. So our probability will definitely fluctuate.

And also not only probability, but also profit factor, average trade, it will fluc-
tuate on different days-of-weeks.

However, if you start applying them to your existing strategies, then the risk
of overfitting can increase with too many filters, because that's basically five
filters - Monday, Tuesday, Wednesday, Thursday, Friday - and you will defi-
nitely reduce your sample size, that's for sure.

You will lose a lot of great opportunities too.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 So that's why we don't want to use DOW, day-of-week, as an additional filter
- because if we use it as an additional filter, we will have all these potential
dangers of overfit and sample size reduction and lost opportunities.

So how about we do what I already explained to you?

We increase the position on strong DOW days, and decrease the position on
weak DOW days. That's the point of dynamic position sizing. That's what
we're going to do.

Now, of course, the DOW is just an example, and it is not a dynamite position
sizing method I would recommend. There are definitely better methods, and
I will introduce the very best ones in this programme. That's why you pur-
chased this programme.

But before that, there is one more important thing to understand, and that's
the following. The best dynamic position methods always work with inde-
pendent inputs to define your final position size.

So what do I mean by that?

What I really call independent DPS methods.

Let me explain.

So we will have two kind of methods: We will have Dependent DPS methods,
and Independent DPS methods.

And basically, Dependent DPS (dynamic position sizing) methods will use
these techniques - will use data derived directly from the underlying chart.

So the same data - open, high, low, close - that you use, or used, to develop
your strategy. The same data will be used for dynamic position sizing meth-
ods and decisions.

So it's dependent, because we're still dependent on the same data that we
use for our strategies.

And now, so some can work. I'll introduce to you some very, very powerful
ones, but there are very few good dependent methods. And, again, I'll share
the best with you in this programme but, in general, dependent methods,
when you use underlying data that you already use for your strategies, they

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 are much weaker, and it's much better to work with independent - using
some data inputs that you have not used in your strategy.

That's what I call Independent methods.

So that means inputs that will determine the position size. Inputs that are
not used in the strategy itself. They are independent inputs.

And, for example, this can be time, like DOW - day-of-week.

That's why I also chose this as an example, because it's a very good one. We
used an independent input, and we're using an Independent DPS method,
which is always, not always, but in many cases, much better and stronger
than Dependent methods; or you will also use market internals.

That's something else we will work in this course, and others that I'll share
with you in this programme. So we will use more Independent DPS methods
than Dependent methods, which is quite important.

Again, although Independent DPS methods are preferable, that doesn't nec-
essarily mean they are always better. With some strategies, Dependent DPS
work the best. It's always individual, always depends on the strategy itself.
We just need to use clever Dependent DPS methods, and I will share with you
more in this programme. Actually right in the next module.

So here is an overview what I'm going to share with you in this programme.

So when it comes to Dependent DPS methods, I'll share with you one in Mod-
ule Number 2, which is called Market Contraction/Expansion DPS Technique,
which is very powerful. You will see - very, very powerful.

And in Module 4, I'll share with you some Volatility-based DPS techniques,
both Dependent and Independent.

That's really all when it comes to Dependent DPS methods.

We will work definitely with more Independent.

In Module 3, we will work with Market Strength DPS technique based on an

Independent input.

In Module 4 with Volatility-based DPS Independent technique.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 In Module 5, we will work with Market Internals DPS dynamic position sizing
technique - very Independent method.

And in Module 6 will work with Time-based, but it's not going to be day-of-
week. It's going to be a different one, and it's going to be another Independ-
ent.

So we want to deploy rather independent methods, although some strategies

will definitely work better with dependent.

Okay so that's also important to understand. We have dependent, independ-

ent, and we will work both in this programme.

And now also a quick introduction to 5 key concepts that we will use to dy-
namic position sizing in this programme.

So already in Module Number 2, I'll share with you the first key concept
which is called Market Contraction/Expansion. It's a proprietary technique
using different probabilities and strategy behaviour in different market con-
traction/expansion phases. So I'll share with you.

In Module 3, Market Strength - we will be adjusting position size based on

how much overall strength is currently in the market. It doesn't really make
sense to keep the same position sizing in weak markets. So we will explore
the strength, and we will decrease our position size in weaker markets and
increase in stronger markets.

In Module Number 4, we will work with volatility, adjusting position size

based on volatility, and I think you already know that some volatility levels
can be very helpful, and some very, very harmful. So, again, we should dou-
ble our position on helpful volatility, and reduce on harmful volatility.

That's what we will do in Module Number 4.

And in Module Number 5, we will use the big picture, which is called Market
Internals.

Market Internals will give us some overview about the behaviour of markets
as whole. It will give us the big picture, and we'll adjust the position size
based on that big picture.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 And finally in Module Number 6, we will be adjusting the position size based
on the different probabilities within different entry times. So that's what we
will cover in this programme.

Also with each concept, we will work as follows.

We will use either a dependant or an independent input to create three dif-

ferent zones within our strategies.

That's very important - three different zones.

And each zone we create behaves differently and have different probabilities
of success. So we will always take some dependent or independent input,
then we will somehow work with that input - I'll show you how. And from
that input, we will create three different zones, and each zone will be a rep-
resentation of a different market behaviour, and definitely of different proba-
bilities of success.

And then we will be working with these three crucial zones.

So Number 3 is very crucial here.

You can be asking why only three zones; why not two or five zones?

And that is a very good question, and actually from our hedge fund research
we came to conclusion that less than three, that means two, is too little, and
more than three can result in the small sample size, and overfitting - very im-
portant.

Although more than three zones can work sometimes as well as two, we've
decided to limit, in our hedge fund, to three zones in 99 percent of cases, and
that's what we will stick with this programme because it's absolutely suffi-
cient. We're not going to be crazy with the number of zones, so that means
we will not be reducing our sample size too much. We will not be risking
overfitting, yet we will be able to pull out the very best out of this concept.

So we will be working with three different zones, and you'll see in this course,
you will understand very well what I mean after the second module.

And by the way, the number 3, that's also the reason why we don't want to
use the DOW concept. Because if you think about it with DOW concept, day-

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 of-week, we would have to work with five zones - Monday, Tuesday,
Wednesday, Thursday, Friday - and that's too much.

That could already significantly reduce our sample size during some days, and
it could be too much already. So that's why we are firm on number three.
That's why I told you that DOW concept is not really recommended. Although
it can be used, we will not work with it in this programme.

How will we work with these zones?

It's very, very simple. A different number of contracts will be assigned to each
zone, and we will work with two versions. We will be either assigning 0 to 2
contracts, or we will be assigning 1 to 3 contracts.

Actually, all the examples I'll show you in the following modules will work
with 1 to 3 contracts.

So 2 contracts will be our base. To reduce our position, we will decrease the
position size to 1 contract; and to increase, we will increase to 3 contracts.

But you can also, and I'll show you, use it with 0 to 2 contracts, so your base
will be 1 contract. On poor probabilities, you will limit it to zero contract, and
on strong days, you will increase it to 2 contracts.

But I personally prefer. and also have better experience from our hedge fund,
with the second one when we assign 1 to up to 3 contracts; or then you can
double it. You can have 2 up to 6; then you can use 2, 4, 6, or 9 - 3, 6, 9.

I'll explain to you, but just to have some perspective right now.

So, for example, when we will be working with volatility, we will take volatil-
ity, we will split it into three different zones. We will establish a low volatility
zone, normal volatility zone, and high volatility zone. And then based on the
probabilities, based on what works best, we will be varying the number of
contracts.

So, for example, this is just an example, normal volatility can have 2 con-
tracts. Now, low volatility can be very harmful for our strategy, so we will de-
crease the size to 1 contract. And high volatility they can be very beneficial,
so we increase the position to 3 contracts.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
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 So that's how, basically, we will work with the zones. Again, you can then use
different numbers like 2, 4, 6, or 0, 1, 2.

So with the first version, the zone two would have 1 contract, zone one
would have 0 contracts, and zone three would have 2 contracts.

But I assume you get the point, you understand the concept.

And the last thing during the entire course, entire programme, I will work
with a testing strategy. This is a breakout strategy. It's a testing strategy. It's
not an actual strategy I would use.

I assembled this as a testing strategy, so we will be testing all the concepts

with this one simple strategy. The strategy trades, it's based on my usual
breakout model, which means one of initiation plus minus space and some
filter. You're already familiar with that from the Breakout Strategies Master-
class, and we will be using this testing strategy in every module as a strategy
that we will try to improve with different dynamic position sizing techniques.

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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS