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Position Sizing Software

I'm still trading well below my usual risk tolerance, but nonetheless up 10% for January, though could be 25%..

A. B. Private Trader

Risk Disclaimer Testimonials herein are unsolicited and may not be representative of the experience of other Customers and is not a guarantee of future performance or success.

What is Position Sizing ? 

Correct Position Sizing is one of the most important parts of a successful trading approach, however is not used in the vast majority of trading software or mentioned by most trading gurus. So this material may be new to you!

 

Position Sizing uses a chosen % risk on each of your trades, so sizes the position to take account of the difference in the trade entry and initial protective stop levels for different trades. Different trades have different trade entries and different stop levels - sometimes the entry is close to the initial stop level, sometimes it is further away. If you always traded in a set number of lots (forex), shares (stocks) or contracts (futures), your initial risks between these different set-ups would vary. If your initial risk varies from trade to trade, it is impossible to keep your losses small and constant. The only way to achieve this is by the use of correct Position Sizing.

 

You will have heard of the phrase keep your losses small and your profits large to succeed in trading. But what this fails to address is exactly how to achieve it when you have different initial risks on different set-ups and across different markets. More importantly, this is the only way to get your profits to relate directly to your losses. This is vital if you are truly to have profits that are large in relation to your small losses.

 

This may seem complicated but the solution is simple. All you have to do is apply the same % of your trading account to each trade. To do this, you will have to vary the number of lots, shares or contracts you trade - to keep this initial % risk constant from trade to trade.

 

For example, we suggest a maximum risk of 1-3% for trading futures, 0.1-0.5% for stocks, 1-3% for forex and 1-2% if you daytrade.

 

So, for a 2% risk on a US $20,000 account, this would mean an initial risk of approximately $400 for each of your trade set-ups. You then have to calculate how many lots, shares or contracts to trade for this $400 initial risk, based on the trade entry price and the price of your initial protective stop.

 

This may seem complicated but MTPredictor makes it very easy because MTPredictor perfroms the Position Sizing calculation for you automatically:

 

Let’s take a look at an example on the 5min UK FTSE   index future, using a 2% risk on a £20,000 account.

Click on the chart to enlarge

As you can see, at the time of the initial set-up, the number of lots, shares or contracts is automatically calculated for you by MTPredictor - this is the variable from trade to trade - to keep and maintain your small, constant % risk from trade to trade.

 

Here you can see, based on the trade entry level and the level of the initial protective stop, the software suggests you trade 2 contracts for a 2% risk on this sample £20,000 account. This kept the initial risk just below our £400 (2% of £20,000) level. This is what we refer to as one risk unit or 1R.

 

Let’s take a look at another example, this time on the US e-mini (ES) on a 3min Chart, using a 2% risk on a $20,000 account

Click on the Chart to enlarge

As you can see, at the time of the initial set-up, the number of lots, shares or contracts is automatically calculated for you by MTPredictor - this is the variable from trade to trade - to keep and maintain your small, constant % risk from trade to trade.

 

Here you can see, based on the trade entry level and the level of the initial protective stop, the software suggests you trade 4 contracts (this is the Position Sizing variable) for a 2% risk on this sample $20,000 account. This kept the initial risk just below our $400 (2% of $20,000) level. This is what we refer to as one risk unit or 1R.

 

The result was a very nice porfitable trade of +5.5R, or approx $1,900 on a $350 initial risk (ignoring slippage and commission). But the important point is how this Profit was much larger (5.5x) than the initial risk.

 

But now comes the really important part…how the profit relates to this initial risk…

Too many traders just look at profits in pure money terms and have no idea how this relates to their losses. This is what I was talking about on the prior page, and is one of the reasons most amateur traders are unable to make profits that are truly large in relation to their losses.

 

In the FTSE example above, when this trade was stopped out the profit was approximately +6R or 6x the size of the initial risk. This is what is important - not the £1,900 profit but how this £1,900 related to the £320 (excluding slippage and commission) initial risk required to take the trade. In other words, you should look at all your profits in risk units, not just money terms.

 

This is what is meant when we talk about a profit being +6R - it describes how big the profit is in terms of the initial risk of the initial set-up.

This is absolutely vital, however many people have never heard of Position Sizing, so why is this? Well, put bluntly, the vast majority of traders are not successful so have no idea how important correct Position Sizing is to long-term trading success…

 

This also leads on to one of the most misleading beliefs held by the vast majority of losing amateur traders - that you have to be correct or have a high % of winning trades to be successful. This is complete rubbish - sales propaganda generated by self-appointed gurus or sales people who have no practical trading experience themselves.

 

Summary - Position Sizing

To apply correct Position Sizing to your trades you start by risking the same % of your trading account on each trade. To do this, you will have to vary the number of lots, shares or contracts you trade to keep this initial % risk constant from trade to trade.

We suggest a maximum risk of 1-3% for trading futures, 0.1-0.5% for stocks, 1-3% for Forex and 1-2% if you day-trade.

So, for a 2% risk on a US $20,000 account, this would mean an initial risk of approximately $400 for each of your trade set-ups. You then have to calculate how many lots, shares or contracts to trade for this $400 initial risk, based on the trade entry price and the price of your initial protective stop. As you have already seen, MTPredictor automatically makes this calculation for you.

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