I'll have to admit I was disappointed in the pic (I expected something of more detail and usefulness). Money management or position sizing depends mostly on your trading system's expectancy.

Simply put let's say your strategy promises a gain of $2 for every $1 risked. Let' say out of four trades 3 usually ends up losing $1 and the 4th earns $8 (this is a simplification to explain a concept as in reality it would be more complex than this). So in four trades you risk $1 in each ($4 total) and in the end you have $8. At first glance one might say if we risk 25% of equity in each trade we'll end up with 200% equity after 4 trades right? Unfortunately its not as simple as that. After the 3 losses we're not sure the next is a gain, that would be falling for the gambler's fallacy.

In every trade there's a 75% chance of a loss and a 25% chance of a gain. In two trades there's a .75 * .75 = 0.5625 or 56.25% chance of two losses and a 0.25 * 0.25 = 0.0625 or 6.25% chance of two gains, while the rest is 100 - (56.25 + 6.25) = 37.5% chance of 1 gain and 1 loss.

Why do I bother telling this? Because you can see that it's easy to have 2 consecutive losses while it's unlikely (but still possible) to have 2 consecutive gains. Since it's said that for a possibility to be significant it has to have at least a 5% chance of happening, let's see how many consecutive losses is likely for this system. Multiplying 0.75 by 0.75 ten times gives us 0.056 or a 5.6% chance of happening meaning it's realistic to expect having more than 10 consecutive losses (actually I wouldn't be surprised if in reality max consecutive losses would end up twice that).

The objective of money management is to limit losses such that when the unfortunate event of experiencing that high number of consecutive losses we would still have enough equity to still trade and experience the gains. Take note if we lose 20%, the remaining 80% would need to gain 25% to recover (the 20% loss is equal to 25% of our remaining 80% equity). If however we lost 50%, the remaining 50% in equity would need to have 100% gain to recover, which is difficult to do. This is where risk preference comes into the picture, let's say we're only comfortable with losing 25%, the remaining 75% would need 33% gain to recover to the original equity, a somewhat achievable objective in my opinion. So to be sure let's expect 15 consecutive losses to be possible, and we would need those 15 losses to only take 25% of our equity, 25 / 15 = 1.67. So each time we trade we would only put 1.67% of equity to ensure that at worse we would only have a 25% loss in equity.

This does mean we might have less gains than when placing say 5% in each trade however we would also have significantly less chance of blowing up.

How accurate your calculation depends on how you determine the chance of a gain or loss. If you trade by discretion you would need to record each trade you make and need probably a year of trades before being merely somewhat sure of each trade's expectancy. With system trading, backtesting would give an idea (provided you use accurate historical data) and it would be best that you also do forward testing too.

I decided to post this since money management is being confused with different things and because most discussions are only about this or that indicator promising "great gains". The truth is you don't know the expectancy of an indicator in your system until you measure it, and failing to do so might lead you to place too much in losing trades and you end up blowing up before experiencing the gains.

HTH.