Position Sizing - How much should I trade?
Position sizing is all about how much, in terms of percentage amount of your overall account should you be willing to risk on a single trade.
Far to many traders make a huge mistake at the start by choosing to risk far too large a percentage of their accounts on any one trade. They have an over confidence that their new found knowledge is much greater than the average newbie and so believe they will achieve complete global domination of the financial markets inside one month. Only to find that after a limited amount of trades their trading careers come to an abrupt end and global domination is over before it ever really began.
That is why position sizing is so important to us all if we are going to get this right.
"So how much should I trade?"
Well we believe that most sensible positions on this would recommend that 2/3% of your overall pot should only ever be risked on any given trade. Now I know what your thinking "it's going to take me years to buy that boat I have my eyes on", right?
Well yours might not be a boat but you get the point, and the thing is as much as I hate to have to say it but at some point we all have a loosing streak. So when this happens will determine your chances of staying in the market, will you be risking to much and be out? Or will you be using a sensible position sizing strategy and after you come through the other side of your loosing streak still be in the market to reap the profits that will come your way. This is how we will achieve our long term goals.
For example if you have set your max risk at 2%, you would have to loose in theory 25 times in a row to wipe out only 50% of your account and how unrealistic is that? We would hope by the way, that you stop way before you hit 25 and evaluate your trading strategy to see what's going wrong but it does take away a lot of the stress when you adopt this approach to position sizing.
It's just simple math to work out how much to risk on a single trade.
For an account size of 500 and a risk of 2% the amount per trade would be 50
For an account size of 5000 and a risk of 2% the amount per trade would be100
For an account size of 10000 and a risk of 2% the amount per trade would be 200
For an account size of 500 and a risk of 3% the amount per trade would be 75
For an account size of 5000 and a risk of 3% the amount per trade would be 150
For an account size of 10000 and a risk of 3% the amount per trade would be 300
To help you with the calculations you could put everything into a spread sheet so that can automatically workout for you your position sizing. We will be publishing one here soon and we will be making it available to download for free if you’re not sure how to go about that.
The most important aspect of trading must be to protect your capital, keep the risk of wiping your account out to a minimum so as to make it as hard as possible to lose over the long run. The aim is to take the stress away and to help you sleep at night no matter what happens. Trading should be fun as well remember.
Return from Position Sizing to Managing Risk.