Many traders focus exclusively on finding profitable trade rules and ignore this step. Although you can trade a system profitably using a fixed number of shares or contracts, you can often improve performance by changing the position size. Entering larger trades as profits grow and placing smaller ones as losses mount can help you make the most of market opportunities and minimize drawdowns.

To show how this works, we’ll test a countertrend strategy that uses the stochastic oscillator to locate short-term market reversals. Back-test results show the basic approach is profitable, but adding a simple position-sizing formula boosts its performance.