Lisa, I simply meant that, at best, T/A predicts the up or down market moves with a high probability but not certainty. For example, according to T/A (not to mention F/A) the market can be extremely oversold and yet still keep going down (Sep 2001) and it can likewise be extremely overbought and still keep going up (late 1999). Or, there can be a single day with an extreme market movement down (Oct 1987) or up (Jan 2001).
So, it is not optimal to bet 100% of the account based on T/A predictions since there is always a non-negligible probability that the oversold/overbought conditions will be continue. That's why money management (i.e., positon sizing) is the crucial aspect of a successful system. This is explicitly embedded in the Turtle system of Richard Dennis (who earned $200,000,000 through trading) and also emphasized by Ed Seykota (who had 100% average annual returns for 12 consecutive years and developed the first computerized trading system for a major firm).
Now, there are some tools in probability theory that are of help in estimating the correct position sizes (Kelly's formula for the fixed-fraction betting system) and in calculating the chances of "blowing up" that is losing 100% of the account (solution formula for the gambler's ruin problem). These are a bit too simplistic for the stock market case but still provide important insights.
All this becomes even more important when using leverage (margin, Profunds 2x leveraged funds, options, futures). Leverage is absolutely crucial in order to achieve average returns of, say, 100+% a year as many top traders have done (trading futures, options, commodities, etc.) And yet, without disciplined money management, leverage exacerbates that much more the risk of "blowing up" the account. Incidentally, I am reading now Lowenstein's book on Long Term Capital Management where some these issues are brought up.
