Ideal position size for best risk/reward ratio

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deronwagner

I would like to discuss what other traders do in order to adjust their position size based upon the price/beta of the position. It seems like traders talk so much about this trade or that trade, but nobody ever seems concerned with how big of a position to carry. The longer I am in this business, the more I realize that having the right position size will make or break me.

Anyway, I have developed a simple Excel calculator that I use to calculate my position size based on the stop loss of the trade, my account equity, and the amount I am willing to risk on the trade. In other words, I have personally found that risking a maximum of 1 - 2% of my total trading capital per swing trade is a good starting point because it allows me to "live to fight another day" in the event of a string of bad trades. However, for intraday trades, 0.5% is the maximum I typically risk. Using a one percent maximum risk and a $25,000 trading account, the maximum dollar amount I would risk on each trade is $250 (1% x $25,000). Notice that I am calculating the 1% risk as a percentage of actual capital, NOT including margin.

Once you have established the maximum dollar amount of risk you are willing to take on each trade, you can work backwards through an equation to calculate the maximum number of shares you should be taking on any given trade, based on your maximum dollar loss limit and the stop loss of the trade. Here is the formula I use:

Account Equity * Maximum Percentage Risk per trade = Maximum Dollar Loss Per Trade

Maximum Dollar Loss Per Trade / Actual Stop Loss = Maximum Number of Shares

Anyway, I have attached the calculator to this message if anyone wants to check it out.
 

Attachments

Yeah that's standard risk procedure , with moderate gain potential and small fixed losses. best for positional trading or someone with substantial capital. For an under funded trader (10k or less), the profit potential may be too conservative and a much higher risk % would have to be considered.
 
deronwagner,

you are setting yourself up for disaster, not all stops are equal. Basically you are taking a small position for a high priced stock and a really big position for a low priced stop. You are not even taking Volitility into account.
 
Actually, the spreadsheet that I use ABSOLUTELY takes volatility into account because the volatility determines where I set my stop loss on each trade. Generally speaking, the more volatile the issue, the looser of a stop I give it, which directly impacts the position size I take. It is NOT based purely on the price of the stock because that would not work, as you suggest.

I also trade exclusively ETFs, and hold most of them anywhere from 24 - 72 hours, so that is much different than the criteria that an intraday scalper would use.
 
Originally posted by bigscalper
volatility should determine position size, not so much stop
More...

Bigscalp,

You are missing the point... He bases his ISP (initial stop placement) or risk on volatility, which is in turn determining position size.

Pabst,

What is your point about the 9/11 out of curiosity???
 
Deron,

With all due respect the information you posted above is pretty generic and I am sure most traders on this board already know how to determine position size based on what % of capital to be risked...

The real key imo is knowing what % should be risked for the various methods a trader might employ...

I really cannot see how your post even touched on the title of this thread?
 
I think this subject is pretty generic. My question is why are there still traders that wipe out? I'm interested in knowing traders that know it all but wipe-out!

trend456
 
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