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.
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.
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