Proper Position Sizing for Trading
|April 25, 2009||Posted by admin under Intro to Trading, Techncial Analysis Tutorials||
Proper position sizing is something many traders never even think of, let alone learn to master. Here is a very quick guide to position sizing. I am publishing a full article on this topic and will post the information on where it can be attained when it is available. So in the meantime….
To determine our positions size we must first set a stop level. This should be a logical place which will be out of range of normal market movements, and if hit will be at a level where we know we are wrong about the direction of the market. Setting stop losses will be covered in future tutorial posts. Remember a trader should not risk more than 1-3% on a trade. Less is better. Larger accounts are likely to risk much less than 1% of capital on many trades.
Let’s say we choose a stop which is 50 pips below our entry buy price. If our account is $5000, we can have a maximum loss of $100 if we risk 2% of our capital on the trade. Therefore, we now know that we can take a maximum of 2 mini lots on this trade. If our stop is hit, we will lose 50 pips X 2mini-lots, or $100 on a mini account (each pip is worth $1 approximately in a mini account).
Whether we risk a percentage of our account on each trade, or choose a fixed dollar amount we are willing to risk on a trade (for larger accounts) the method above should be employed to determine the proper position size based on the stop level which is ideal for the trade. This means each trade may be for different qualities, depending on the dynamics of the trade set up.
~Cory Mitchell, CMT
Remember, failed breakouts are tradeable too!
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