Position sizing

[Trish]

$ Same amount-every trade.
What is the consensus of the traders on ET who are doing well? If you're confident in your decision to enter a trade than your investment entry should reflect that. (Why enter a trade at all if you didn't think you'd benefit and play with less cash amount?) If the trade is very bullish or bearish, do you increase your position size incrementally or the same percentage as entry?

 

[forex5x]

The position size is set in my trading and tied to the account size.

As the account grows the ratio is kept the same.

If you have a set of signals that have higher probabilities then increasing your position size could make sense.

More important than position size is RISK SIZE.

Each trade is calculated at its potential risk level.
This needs to be kept contained.

Overtrading can look good when your are winning but tag a loser at high risk levels and you can get very burned.

A loss of 2% will barely affect your account but a loss of 20% can be a few steps to failure. With 2% you can lose 50 times (more or less) and with 20% you can't afford to lose more than 4 times.

 

[Raystonn]

None of the above. Honestly, I have no idea what you mean by the last two options.

-Raystonn

 

[Trish]

Quote from Raystonn:

None of the above. Honestly, I have no idea what you mean by the last two options.

-Raystonn

For example: you enter every trade with an investment of $5000 consistently. When the stock reaches a point of increasing your position size, how much do you add to your initial investment? Another $5000? $1000? etc.

 

[Rearden Metal]

Quote from Trish:

For example: you enter every trade with an investment of $5000 consistently. When the stock reaches a point of increasing your position size, how much do you add to your initial investment? Another $5000? $1000? etc.

The wording here is all wrong. Trades are trades and investments are investments.

"you enter every trade with an investment of $5000 consistently"
...is like saying- "When you play basketball, do you prefer to play quarterback, or would you rather play first base?"

No offense intended, just constructive criticism...

 

[HolyGrail]

You let your risk level determine your position size.

If you choose to have a 1% risk level and you have 100,000 dollars in your account then you risk losing 1000 of every trade you make.

If the stock is selling for 25.00 but you have to give it 2.00 worth of room then you can only buy 500 shares of this particular stock.

If you keep the same risk percentage then as your account goes down you are lowering your overall risk and as your account increases you are increasing overall risk but NOT ON A PERCENTAGE BASIS.

 

[Trish]

No offense intended, just constructive criticism... [/B][/QUOTE]

None taken.
I was coached to have the same initial investment per trade with consistency by Dennis M., my coach with Investools over a year ago and would like the opinions of others....... even if the opinions are spicy.

 

[Trish]

Quote from HolyGrail:

You let your risk level determine your position size.

If you choose to have a 1% risk level and you have 100,000 dollars in your account then you risk losing 1000 of every trade you make.

If the stock is selling for 25.00 but you have to give it 2.00 worth of room then you can only buy 500 shares of this particular stock.

If you keep the same risk percentage then as your account goes down you are lowering your overall risk and as your account increases you are increasing overall risk but NOT ON A PERCENTAGE BASIS.

Holy cow. I like it.

 

[daytrade]

depending on the position being taken, me being a trend fader, not all trades are of pure confidence, so a pyramiding action is used, this also depends on the time i plan to hold the trade, so if im going short on an uptrend ill do an upside down pyramid , buying double the amount at each specified level , leaving my biggest position at the final price as my trade turns to profit{ risky } if i see a trend ill buy a position , then scale in larger at about a 1/5th basis at predetermined levels, with the number one rule being no averaging down from previous purchase, leaving no possibility of a large loss, but on the small percentage of time this works out a large profit is taken.

{ mine as well let you know that im a scalper, and these are things im hoping to do, but slowly mentally working into them,,i still figure methods can be used in all different time frames, these ideas may be way out of whack, so like the thread starter please comment, and ill be looking forward to others posts. }

 

[mschey]

There are a few different options for position sizing.

One can risk a fixed fraction on each trade....i.e. the 2% solution. One can also trade this method based upon acct size, that is trade 1 contract for every 10k in the account.

If one wanted to maximize growth, you should study the concept of optimal f. This is the % of capital to risk on every trade that will maximize the growth of the account. The downside is that the drawdowns can be severe. This strategy considers the largest losing trade, and uses that to determine how much to bet on each trade.

An alternate version, is to consider drawdown, instead of largest losing trade. Slightly more conservative, the drawdowns will still be very large.

The latest and greatest on the optimal f front, is the concept of scenario spectrums. That is creating your own scenarios for the possible outcomes on a given trade, accounting for as many one can imagine, and bet the optimal amount based upon your forecasted results. (This sounds wonderful in theory, but I have yet to be able to determine the outcome of any of my trades in advance, and assigning probabilities to outcomes seems more like voodoo, then anything else!) If you're an optimist like me, you'll likely skew the scenarios in a positive direction, and if you're a pessimist you'll skew them in a negative direction. Neither is optimal, but if one has to error, it is better to error on the side of caution, as there is no benefit to be gained by trading more than the optimal number of contracts on any trade.

Then there is the fixed ratio method, pioneered (if you could call it that...I'm sure traders were using a similar method years before him!) by Ryan Jones. This method requires one to increase contracts at a fixed ratio. If it takes 10k of profits to increase to two contracts, then trading two contracts will require one to earn 20k of profits to trade 3 contracts and then continue from there.

Last, the method Williams writes about, is this. Decide on an amount you are willing to risk on a given trade, for instance, 5%, 10%, 12%, maybe even 18%. Then take your account balance and multiply it by your risk %, then divide that by the largest loss, and that's how many contracts you'll trade. The key to this strategy is to use the actual largest loss, or your perceived largest loss.


There you have it, a summary of methods for position sizing and risk management. Set up a couple of spreadsheets, study and really know your strategy, it's strengths and weaknesses, and then figure out which method will work best for you.