Evade Huge Losses With Position Sizing
posted in Used Car Donations |From all appearances, position sizing is a basic trading money management concept. This is part of a comprehensive trading system and aims to identify the size of each trade entered into. Some beginners don’t pay enough attention to this factor. They tend to think that all they really need is to set initial stops. Focusing on just placing stops however isn’t a very comprehensive plan at all.
Size identification can accomplish one thing well and that is to protect your trading capital. When you’ve arrived at the figure that you know you can securely trade you’re ensuring that your float does not get eroded. Position sizing also offers the opportunity to determine loss and win possibilities.
What many investors don’t realize is that size matters. The amount that you put in is the indicator of how much you might earn or lose. The more units you purchase, the higher your chances of winning. This is why some immediately invest a lot, thinking that the more risks they take, the more rewards they get. Deciding on this factor however based only on the chance to profit well is not advisable. Remember that a big investment also magnifies your chances of losing. To arrive at the ideal option for you, your risk management system should incorporate a scientific way of defining the extent of an
investment.
Getting the right guiding figure to enter a trade isn’t as complicated as you would envision. You simply have to divide your already predefined maximum loss in dollars by your trading stop size. The result is the maximum number of units you should purchase on a single trade.
To get your maximum loss figure, select a percentage value that corresponds to how much you are willing to lose. It is highly suggested that you risk losing no more than 2% of your trading capital. This is big enough to offer you good profits but is small enough to limit your losses.
In some cases, you might need to further refine this part of your risk management strategy. Depending on your tolerance for risks, you may still view the resulting size as too huge for you. In this case, it would be wise to add another rule to keep your investment money safe. You can set a maximum percentage figure that corresponds to a specific dollar value over which you are not willing to lose. You can state for instance that you are not willing to lose more than 20% of your total float. Hence, if the result of your initial size calculations goes over this, you can follow your extra rule to further scale down your buy of units.
Some traders can get too technical with position sizing. It’s only really right though that a lot of attention be put on this risk management step. Put as much thought into this part as you would on identifying stops.