Calculating position size under many of these formulas is tricky stuff. That’s why brokerage firms and trading software packages often include money management calculators.

Optimal F is only one method. There are other methods out there, and none is suitable to all markets all the time. Folks trading both options and stocks may want to use one system for option trades and another for stock trades. If that’s your situation, you have one big money management decision to make before you begin: how much money to allocate to each market.## Optimal F

The*Optimal F*system of money management was devised by Ralph Vince, and he’s written several books about this and other money management issues. The idea is that you determine the ideal fraction of your money to allocate per trade based on past performance. If your Optimal F is 18 percent, then each trade should be 18 percent of your account — no more, no less. The system is similar to the fixed fraction and fixed ratio methods, but with a few differences.

The following figure shows the equation for finding the number of shares of stock, N, to trade according to the Optimal F method.

The equation for finding the number of shares to trade under Optimal F

An example of the Optimal F calculation

Some traders only use Optimal F in certain market conditions, in part because the history changes each time a trade is made, and that history doesn’t always lead to usable numbers.