A managed-futures trader lays out his exact position sizing and stop rules with real dollar examples. The entry signal underneath all of it is a Donchian channel breakout that has been public and arbitraged since the 1980s.
The one idea
Andrew Abraham's whole book rests on one idea: you cannot control whether a trade works, so control what you risk on it. He puts a hard number on that, roughly 1 percent of core equity per trade, and then builds a stack of secondary caps around it, a sector cap, a per-contract dollar cap, an open-trade-equity cap, so that no single winning streak or correlated cluster of trades can quietly turn into an oversized bet.
The entry method itself is not new. It is Richard Donchian's channel breakout (buy the X day high, sell the Y day low), the same idea Richard Dennis and William Eckhardt taught the Turtles in the 1980s, filtered through a rate-of-change ranking to find the strongest and weakest markets and an MACD filter to confirm direction. Abraham adds a retracement variant using a higher time frame MACD plus a lower time frame oscillator to pull into pullbacks instead of chasing breakouts.
Exits are two-stage: a hard stop set at the opposite channel boundary (the Y day low for a long), replaced once the trade is working by a trailing stop built on average true range (ATR), the volatility measure J. Welles Wilder introduced in the 1970s. The book is explicit that most individual trades lose small amounts and the plan only pays off because a few trades run far enough to cover them.
What it actually teaches
Abraham runs every candidate trade through the same seven-step checklist before entry, which he compares to a conveyor belt.
RANK THE UNIVERSE BY RATE OF CHANGE
Score every market on a smoothed rate of change, averaging three lookback periods (his example uses 2, 5, and 7 periods) on the higher time frame. Only the strongest-ranked markets are candidates for longs, only the weakest for shorts.
CONFIRM THE BREAKOUT RISK IS UNDER 1 PERCENT
Buy the X day high, sell the Y day low (his worked example uses a 20 day high and 10 day low, the same parameters Donchian and the Turtles used). Measure the dollar distance from entry to the stop and size the position so that distance costs no more than roughly 1 percent of core equity. Worked example: a $100,000 account risking 1 percent ($1,000) on a $4 stop distance buys 250 shares.
TRADE ONLY WITH THE MACD
Take the long only if MACD is above zero and rising; take the short only if MACD is below zero and falling. If the momentum indicator disagrees with the breakout, skip the trade.
CAP OPEN POSITIONS AT 10 LONGS AND 10 SHORTS
Regardless of how many valid signals appear, stop adding new positions once you are already carrying 10 in each direction.
CAP DOLLAR RISK PER CONTRACT AT $2,500 (FUTURES)
As account size grows, a flat 1 percent risk can translate into an outsized dollar bet on a single contract (his example: 1 percent of $500,000 is $5,000 on one lot). He caps futures risk at $2,500 per contract regardless of account size to stop that drift.
CAP SECTOR EXPOSURE AT 5 PERCENT
Do not add a trade if the total risk already committed to that sector (tech stocks, grains, interest rate futures, and so on) already equals 5 percent of the portfolio, even if each individual trade looked low risk on its own.
CAP OPEN TRADE EQUITY AT 20 PERCENT
Stop opening new positions once unrealized open profit reaches 20 percent of core equity. Abraham says his worst drawdowns came right after his biggest run-ups, and this cap is meant to blunt that.
What it looks like Monday morning
A reader who actually implements this puts two things in place before touching the market again: a written 1 percent-of-equity position sizing formula tied to the actual stop distance on every trade, not a fixed dollar amount, and a running spreadsheet of exposure by sector and by open trade equity so the 5 percent and 20 percent caps are checked before every new entry, not after a drawdown makes them obvious in hindsight.
The entry itself, a Donchian-style channel breakout with an MACD filter, is fast to code into any charting platform or spreadsheet and does not require the book's proprietary language to test. A skeptical reader's actual Monday move should be to backtest that exact breakout-plus-MACD combination on liquid futures or ETFs before risking money on it, because nothing in the book demonstrates it holds up out of sample.
| Account size | Risk per trade | Entry | Stop | Risk per share | Position size |
|---|---|---|---|---|---|
| $100,000 | 1% ($1,000) | 20-day high breakout | 10-day low | $4.00 (20-day high 20, 10-day low 16) | 250 shares |
The same 1 percent formula (risk dollars divided by stop distance) is used throughout the book for both stock share counts and futures contract counts.
The concept of risk of ruin accentuates the reason why I suggest you take approximately 1 percent risk per trade.Andrew Abraham, The Trend Following Bible
Where it fails
- The worked trade examples are hypothetical, and the book says so. Chapter 7 opens with a direct disclaimer that the ArthroCare, Baidu, Netflix, and other chart examples are hypothetical, prepared with the benefit of hindsight, and 'should not be utilized to provide historical data or make real-life predictions.' The book's index even labels them 'hypothetical trades.' None of them are live trades placed in real time, so none of them demonstrate the method actually working under real execution conditions.
- The manager track records in Chapter 4 are survivorship bias on display. Abraham profiles a handful of famous trend-following CTAs (Salem Abraham, Elizabeth Cheval, Tom Shanks, William Eckhardt) with hypothetical compounding charts showing a $100,000 stake growing to $5 to $20 million over 20-plus years. These are the survivors of an industry where most CTAs close or shrink; the book names no failures from the same era to weigh against them, and 'past performance is not indicative of future performance' appears as boilerplate rather than as an actual caveat applied to the numbers shown.
- The core signal is public domain and arbitraged away since the 1980s. The entry method is Richard Donchian's channel breakout, taught openly to the Turtles by Richard Dennis and William Eckhardt in 1983 and published widely since. Academic and practitioner studies of trend-following CTA returns show the strategy class has delivered materially lower and choppier returns since roughly 2011, the same period the book was written in, as more capital chased the same signal across the same liquid futures markets.
- It assumes a futures or full brokerage account with real capital, not a small stock account. The dollar caps ($2,500 per futures contract, a 1 percent risk on a $100,000-plus account) and the sector diversification advice (trade a portfolio of uncorrelated futures markets) assume the reader already has meaningful capital, a futures-capable broker, and enough account size to hold 10 longs and 10 shorts across multiple sectors at once. A reader with a $5,000 account cannot build the diversified, multi-sector portfolio the risk plan depends on.
- The retracement entries specify indicators (Retracement Osc, Elder Force Index) without defining them precisely. Chapter 8's pullback entries rely on a 'Retracement Osc' crossing zero and Alexander Elder's Force Index, but the book never gives the formula or settings for the Retracement Osc, only that it is available in MetaStock. A reader without that exact indicator cannot reproduce the retracement half of the method from the book alone.
- No forward or out-of-sample test of the author's own combined system appears anywhere. The book shows individual hypothetical chart examples and separate historical manager returns, but never runs the author's full seven-step system (rate of change ranking, breakout, MACD filter, position sizing, ATR trailing stop) as one continuous backtest with an equity curve, win rate, or drawdown statistic. The reader has to take the combination on faith.
Who it is for
Buy it if
You already trade futures or a diversified stock account and want a concrete, numbers-based framework for position sizing, sector caps, and stop placement rather than vague risk advice. The risk management chapters (5 and 6) are the strongest part of the book and translate directly into a spreadsheet.
Skip it if
You are looking for a novel or edge-preserving entry signal, or you trade a small single-asset account where sector diversification and 10-position caps do not apply. Anyone who wants backtested evidence the combined system works, rather than isolated hypothetical chart examples, will not find it here.
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