Position Sizing Cheat Sheet

 

 

 

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Position Sizing Rules Position sizing is an important part of trading. Your position size is one of the determining factors as to how much you win and how much you lose on a trade. This brief report will help you understand how to determine your position po sition sizing and risk every time you trade.

So what is Position Sizing? Position sizing is a simple concept that asks the question, ‘How Much?’. In other words how much should you risk on any given trade. There are several factors that go into answering this question, the two most important being:   Determining your trading objectives   Knowing yourself i.e., what is your "risk personality"

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For example, you might be young and aggressive in your investment strategies... which means you will more than likely will have a higher tolerance for risk. On the other hand, you may be nearing retirement and are only looking for supplemental cash flow. Because of this, you may not want to ta take ke major risks. No matter what your objectives are, you can achieve those objectives through the proper use of position sizing. When I figure up my position size for a particular trade I also take several things into account. The most important of which is what is my potential reward on this trade. This is known as Reward to Risk Ratio or RRR. If my potential reward is three to four times greater than my potential loss I will be more aggressive in my position size. Ichoose am including different position-sizing parameters based three on your objectives and your risk tolerance.here for different risk levels so you can

 

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The Three Levels of Position Sizing You must determine what your goals are and how h ow much of a drawdown you can withstand. With this in mind, and to keep it simple, I recommend using three levels of position sizing: 1. Conservative 2. 3. Moderate Aggressive The table to the right shows you how much is needed to recover to breakeven, based on the amount of drawdown that you suffer Notice that it takes 43% to recover to breakeven with a drawdown drawdown of 30%. Then, at 45%, you must make a recovery of 82% on your remaining equity. You can see from this chart how important it is to have a disciplined approach to risk and money management. There are a few simple rules to follow when it comes to determining your position sizing. 1. Never compound backwards – If you start with $2,000 and your account falls to $1,000 do not use the position size of a $1,000 account. Stick with the original position size that you started with. 2. Always compound upwards – If your account grows from $1,000 to $2,000 begin using the position sizing for a $2,000 account. 3. Stay with y your our initial risk lev level el – Whatever the initial risk level you choose, stick with that level. The only exception would be if you are starting with a lesser risk level, you can move up. Therefore I recommend starting with the Conservative risk level for your first month to see how you handle it.

 

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Fractional Position Sizing Now that you have a basic understand of position sizing and it's importance, the actual position sizing formula that I use is known as Fixed Fractional Position Sizing.  With this type of position sizing you are basing your risk in each trade on a fixed percentage of your account. For instance if your account is $1,000 and you decide to risk 1% of your account, then you would be risking $10 in that trade. Here is how the formula works. N = f * (Equity/ (Equity/Trade Trade Risk) N stands for the number of lots to be traded. F stands for the fixed risk percentage. Let me give you a real life example that will be easy to understand. N = 2% * ($10,000/100 pips) $10,000/100 pips is 100. 2% * 100 = 2 So the number of lots equals 2 or in this example, 2 mini lots. Each increment of 1 is equal to 1 mini lot. So 10 would be 1 full lot. In this trade you would be risking $200 of your account equity. So if the trade were to be a comple complete te loss you would lose $2 $200. 00. It’s a pretty simple formula but the good news is that you don’t have to calculate all of this on your own every time. In the members area you will find a position sizing calculator that will help you easily figure your position size based on your starting account balance. Practice with you position sizing sizing approach while you demo-trade demo-trade if necessary. Once you are clear on your risk tolerance, you can start s tart trading in real time and growing your account.

 

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