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Position Size

April 2004
by
Mike Kidwell

Scientifictrader.com
 

 

Position sizing is a simple, effective trading strategy to maximize profits.  Even with a great  trading system, if you don't manage your money properly, you're just polishing the brass handles of a sinking ship.  Yes, even if you have a great strategy, poor position sizing will run your financial ship of opportunity into the rocks. 

 This is especially so if your trading account is not very large.  For the sake of simplicity, lets' say you have an account of $100 and you invest $25 per trade.  Obviously, if you incur only four losses in a row, your account would be wiped out!

On the other hand, what if you invested only $2 per trade with the same account (the famous 2% rule)?  It would take a string of fifty losses to clean you out.  But, being unnecessarily "safe" can also result in a loss in profits.

For instance, with the above example, lets' say you profited on 60% of the trades and lost 40%, 100 trades total.  Lets' further assume that the winning trades produced 10% profit each while the losing trades produced a 5% loss each.  Applying the 2% rule above would have only earned you $8 total, while trading the larger position would have earned you $130!  Over s16 times more!  Now I'm not saying to invest 25% of your equity per trade, but this demonstrates that you need a basis for determining your correct position size. 

Unless you've got money to burn, you need a correct position size to balance the best AND safest return on your account.  Otherwise, you risk losing too much, or profiting too little.  The Laws of Science can determine that amount for you and that's where you need: Position sizing is a simple, effective trading strategy to maximize profits.


Position Sizing In Action

To determine the most profitable position size, you need to take into account how much you expect to win / lose and how often you expect to win / lose, then you need to give the  weight to each piece of data.  Not just any weight, the correct relationship in these numbers can and will make the difference between success & failure

 Obviously to employ this, you must have a specific trading plan so the output will be consistent with the input.  If you have already been trading with a strategy, this is where you want to obtain this information from.  If you are embarking with a strategy for the first time, then you should at least back test the strategy on some trading software to get a rough idea of how you will do. 

If you are using back tested data, it's best to use conservative figures.  As time goes on and trades are closed, then you should start using "real" data for this purpose.  For a sound on line stock trading plan based upon Scientific principles, see "Swing Trading, A scientific Approach". 

If you would like a calculator that will recommend  the optimum amount of your brokerage account to invest in each stock transaction, based upon the mathematical relationships of the percentage of wins / losses and there respective amounts, then follow the link below to download a free position size calculator. 

http://scientifictrader.com/poscalc.htm

Using this method, mathematically optimizes the return on your account to get the most out of it no matter what your trading performance is. Position sizing is a simple, effective trading strategy to maximize profits. 

Remember the saying though, "garbage in, garbage out".  If the figures you enter are not an accurate representation of your trading history, then the investment amount recommended may not be the optimum amount. Additionally, the percentage it recommends is based upon the ever changing total size of your account.  

Proper Position Size = Maximum Profits

Do you realize that without this method of position sizing, you stand the chance of investing too much in bad trades and / or not enough in great ones.  Either way, the result will be the same, a shrinking trading account.

At Scientifictrader.com we are dedicated to helping traders find the path to successful trading.

Would you like to...

  • Learn how this position calculator works?
  • Learn how to accurately detect trends?
  • Learn successful money management?
  • Learn precision entry & exit strategies?
  • Learn the secrets and systems the pros use to trade successfully?

There are two ways to learn these:

 

#1  By yourself.  This is the long and expensive road of trial and error.

 #2  Learn from someone else who has already paid their dues to the trading world.

Take the easy road and sign up now for our FREE Trading Tips & Strategies Course.  You have nothing to lose if you do and only money and time if you don't!  Sign up before midnight and we'll even give you a 2 week Trial of our Premium Stock Picking Service ABSOLUTELY FREE!  This service normally sells for $48.00 per month!

Best regards,

Mike Kidwell
Scientifictrader.com

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.

 




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