- You have $1,000,000 account, and you risk 2% of that on each trade, i.e. you risk $2,000 on each trade.
- You calculate N (the ATR) for the particular contract, and you want to risk 2N, i.e. your stop-loss is 2N.
- Therefore, the number of contracts you buy is $2,000/(2N).
According to the rules above, I should be buying 1,000 shares. And since the share price is $1,000,000, I should be buying $1 billion worth of shares!
This is ridiculous, because I may not even have $1 billion in my trading account to begin with. As such, the rules are just ridiculous since they don't properly take into account how much money I have in my account (my trading capital). Sure, the trading capital is looked at when calculating the risk of each trade, but not for the trade as a whole.
How can this issue be addressed? In other words: Do there exist any good sizing rules that actually take my whole capital into account, so my whole capital is "optimally" allocated?