Position Sizing

I’ve mentioned position sizing above, and I’ll just run through the process that you have to go through to determine how much money you should commit to a single position. You need to take into account the amount you want to risk losing on a trade, and I’d suggest you settle on the guideline of 2% of your trading account. Using your account value at the time, you can then calculate your risk amount.

Looking again at the security you are considering trading, you need to determine how far it can go in an adverse direction before you exit for a loss. This may be just below a previous support level, for example, or based on volatility. After making sure that your risk/return is worthwhile, all you have to do is divide your risk amount by the amount you’re prepared to let the price go against you before you cut your losses, and this will give you the maximum number of shares you should trade so that a losing position would not cost more than 2% of your account.

Depending how tight your stop loss is to your entry level, this may still be too large a position. You need to check it against the other guideline of not putting more than 10% of your account is any one position, and purchase the smaller number of shares.

This entry is filed under course. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.