Jean-Jacques D. De Wit, M.B.A., Business School, University of the Free State, 205 Nelson Mandela Drive, Park West, Bloemfonteitn, 9301, South Africa
This paper determines through empirical testing what position sizing methods deliver the best risk-adjusted returns for a profitable set of Technical Trading Rules (TTRs). First, a practical returns distribution is generated through the application of a set of trend following TTRs to inter day index data on the JSE. Second, different position sizing methods are applied with the same TTR. Finally, the risk / reward characteristics of the different practical position sizing methods are measured using the recent Omega function. The lauded Omega function’s ability to accurately measure risk-adjusted returns of even the most asymmetric, bi-modal and fat-tailed returns distributions makes it the measure of choice in this study. In conclusion, the paper makes suggestions as to sensible position sizing techniques in light of the findings of the risk / reward analysis.