Money Management Position-Sizing Plan

I feel there is not enough talk about postion sizing,so I am going to start a thread on it. if one wants to make money one must have a plan one can be correct 90% of the time and still not make any money worth talking about, if they don't have a position sizing plan in place. Once a trader has established the discipline to keep their stop loss on every trade, without question! the most important area of trading is position sizing.

Most people totally ignore this concept,it should be part of your trading system that tells you how many contracts to take per trade. ideally you should not risk no more than 2 per cent. This plan is for the person who have a reasonable trading system.The first part of the plan is risking 4% on the account.However its based on diffrent levels .Once we get up to around $18,000 the level of risks dropes off per level.

Based on (low risk( (medium risk) (high risk).......I would call this plan medium risk. Please feel to give this trading plan some constructive criticism or maybe can it be improved in some way all coments welcome let the discussion begin.




..........................................Money Management Position-Sizing Plan

Level...... Lot Size..........Min Account ........Min Account ............Stop on any one......Risk on Account
.................=$10................level to enter......before demoted...........Trade...................at different levels
..........................................a trade.................to the previous level.
.....................$..........................$................................$.................................$

0)................................................................$.0.000
1). ...... 1...lot = $10.........$ 2,200............$ 1,500................................$ 80 .................................4%
2). ...... 2 ..lots = $20 .......$ 4,000............$ 2,400 ...............................$ 160................................4%
3). ...... 4 ..lots = $40 .......$ 8,000............$ 4,800................................$ 320................................4%
4). ...... 7 ..lots = $70 .......$ 15,500..........$ 9,500...............................$ 560................................4%
5).... ... 9 ..lots = $.70.......$ 25,500..........$ 18,200.............................$ 720.............................2.8%
6)...... 12 .lots = $120......$ 42,000..........$ 32,000..............................$ 960............................2.3%
7)...... 20 .lots = $200......$ 72,000..........$ 55,000..............................$ 1,600.........................2.3%
8)..... 31 .lots = $310......$ 115,000........$ 85,000..............................$ 2,600........................2.3%
AND SO ON.

Hi Laptop,

Having read through the market wizard books and many other sources:
1. 1% will be my maximum trading size when I start for real. I aim to vary between 0.5% to 1%. Ideally scaling in and out.
2. Below 0.5% for a set number of consecutive losses and after 10 consecutive losses back to the drawing board.

I guess this would be a low risk approach :cheesy:

Cheers Fibonelli

Hi fibonelli

Scaling in and out is easy to say but hard to do, but I do argree with you anything between 0.5% to 1 % is good for your account. I should have said I based post #1 on day trading and one would need a relative good method to trade it....hey we are traders we want to build the account as quick as we can the less time in the market the better. :cheesy:

Does anyone else think 4% is to much to risk, but it is on a small account at one makes more money the risk get less until we get down to 1%...

laptop1 said:

Based on (low risk( (medium risk) (high risk).......I would call this plan medium risk. Please feel to give this trading plan some constructive criticism or maybe can it be improved in some way all coments welcome .

Click to expand...

if a trade is anything but low risk (read high probability) then why take it?

i think position sizing is important, but not in the way most apply it.

personally, i prefer to wait and wait for a high probability trade and then go in all guns blazing. im quick to get out if i dont like what im seeing. id rather trade this way than throwing 2% of my account away on a gamble that something could happen this time round, that has say, occurred 62% of the time last time 'these lines crossed on volume' over the past 5 years.

im more of an intuitive trader (obviously) than a mechanical one. but thats another thread!

i think people will get a lot more out of their trading if they focus on capital preservation and getting out quickly if they dont see quick gains than trading small size (2%) come what may.

but then again, are we talking 2% of the money in my margin account, or 2% of the funds i have available and on deposit elsewhere? now the lines of money management and risk management are starting to blur.

if i was sitting in a bank, or a fund, the chances are that my position size would be dictated either by maximum loss permitable (ie trade as much size as you need to until you hit your limit), or just on the size the risk manager felt at ease with me trading - irrelevant of the total capital available. how many here manage their capital/position size in a similar fashion?

I'm sure we'll be trading only high probability set ups, it's assumed isn't it?

The question is how much % to allocate to the trade. Assuming you have adequately financed your trading account.

charliechan

You are correct, a trader should wait for the right set up. I do this when day trading I can look at about 25 sets up during the day, but I only take 2 to 5 trades, this is based on ER2 looking for 4 to 17 ticks..8 tick stop..........If I got 2 to 3 good trade in. I always run the last trade for as long as I can, I move stop to even quickly, some times I get a move of 5 points that is 50 ticks on ER2....

The reason I stared this thread, I had a PM form someone asking how to build an account as quickly as possible before ones traded method changes. This is the best I could come up with.

laptop1 said:

Hi fibonelli

I do argree with you anything between 0.5% to 1 % is good for your account. .

Click to expand...

death by 1000 cuts more like!

charliechan said:

death by 1000 cuts more like!

Click to expand...

so why do many of the great traders profiled in market wizards do this and recommend newbies to do this?

charliechan said:

death by 1000 cuts more like!

Click to expand...

But I would recommend 1% to any newibe.but one still needs a good method to trade it, if not, it will be just a slow process of blowing an account. but at least it gives them a chance to learn along the way..However, the postion sizing plan I posted one would need to have a reasonable trading system.

So the queston, is the plan to high risk for most?

I think it better to diversify risk in the same way you diverify by market. I have been on a long road from fixed fracion, through fixed ratio and then back to fixed fraction. What I have found to be best bet is to have a number of risk systems that are run independently but together constitute a total volume for any trade. You need to analyse how a system behaves to work out how to best structure this however the end results can be far more effective than sticking to just fixed frac. You need both martigale and anti martingale components which are optimised somewhat just like any other parameters.

charliechan said:

death by 1000 cuts more like!

Click to expand...

Not sure what you mean here charliechan but I agree with Laptop1 that 0.5 or 1% is good capital risk margins for starters.

My understanding is that at 1% margin / captial risk, allows 100 attempts at guessing the market direction and making pips.

At 5% margin / capital risk with £10K would mean risking £500 per trade and you could have 20 goes at playing the market.

The rest is win/lose consistency ratios and risk/reward ratios on your expectancy.

For beginners 0.5% or 1% would be the best advice until pips are in the bag and they feel their expectancy ratios justifies raising position sizes / risk...

This is probably the main reason why most people get blown out of the market with their fingers burnt I'd guess. If you think about it markets can go up or down 50/50. If you follow the trend you increase your probability of getting direction right. Sounds simple enough and with risk/reward ratios and advice to cut losses I'm always amazed at people making loses.

However, as someone who made high losses at the start I know how the pyschology of it can get the better of otherwise very smart individuals (if I may say as such).

The percent risk per trade has to take into consideration leverage. 1% risk may be fine for a future trade, but too low for say a straight equity trade. Also, a day trader of futuers who has numerous trading signals would risk less than a position trader who has fewer opportunities and plans to be invested for several days.

Comparing apples to apples:

1) trading in 100 share lots.
OR
2) basing the shares on a percentage of the account balance (5%) or even basing it on a $$$ value, say $5000 per trade. That way the number of shares purchased will be based on the price of the shares.

Given the two choices above, I would say #2 is the way to go. That way, each trade carries the same weight.

E

Speaking in tongues

No position size ,until you can size the position of the market.

something like that ?

Rightly or wrongly this is how I look at risk, money management, position sizing etc. in relation to my NYSE / NASDAQ day-trading.

And it does work……for me anyway, which is all that matters.

Q1. How much money do I wish to make per day ?
A1. US$ 1,000 ( approx £ 500 ) is quite acceptable.

Q2. How many round-trip trades do I intend to make per day ?
A2. Realistically, about 8.

Q3. What is my proven success ratio using my system / method of trading ?
A3. Approximately 70%.

Q4. How many of those 8 trades will be successful ?
A4. Probably about 5, possibly 6.

Q5. What is my proven Reward / Risk ratio ?
A5. Approximately 2.5 / 1

Q6. What is my base trading capital ?
A6. US$ 50,000

Q7. How much of my base trading capital am I prepared to risk on any one trade ?
A7. 0.25% or US$ 125.


Ok, so if I do 8 trades, I know that I will probably lose 3 of those and incur losses of US$ 375 if I let my stops get hit.

So, in order to achieve my daily target of US$1,000, I need to make US$ 1,375 from the other 5 trades, or an average of US$ 275 per trade.

With a risk level of US$ 125, I therefore need to achieve a R/R ratio of only 2.2 on those 5 trades….something which has proved to be well within my capabilities.

A position size of 500 shares with a stop of 25 cents will get me there comfortably and without too much stress or headaches.

Of course, I might not need to make 5 trades to get there. If I get a good run then I might need less trades. If however, I have made 8 trades in a day and I have not achieved my target I accept it and quit for the day...I certainly do not push myself into bad panic trades in order to achieve a target.

One of the major problems that I might encounter is that I may not be able to identify sufficient good trading set-ups in order to arrive at 8 trades in a day. And if I lose the first 3 and find it difficult to find another 5, then I might be struggling.

However, this rarely happens

NB. I distinguish base trading capital from actual trading capital because I find it more conservative to work off base capital.

Base Capital + profits awaiting transfer to my bank account = Actual Trading Capital.

A very important point to note is that I am not concerned at all if I do not make US$ 1,000 every day.

If I do, then my income level is very nice indeed but If I don’t then I still make enough to enjoy a great lifestyle anyway.

Nearly 4 years using my own money.

Please note that I do not do exactly what I have said above...but I do work along similar lines.

Position sizes may vary according to stop sizes, which are of course dynamic.

I do try to think in very simple terms, use very clear and simple set-ups and not confuse myself with over-complicated ideas and terminology.

Atilla said:

Not sure what you mean here charliechan but I agree with Laptop1 that 0.5 or 1% is good capital risk margins for starters.

My understanding is that at 1% margin / captial risk, allows 100 attempts at guessing the market direction and making pips.

At 5% margin / capital risk with £10K would mean risking £500 per trade and you could have 20 goes at playing the market.

The rest is win/lose consistency ratios and risk/reward ratios on your expectancy.

For beginners 0.5% or 1% would be the best advice until pips are in the bag and they feel their expectancy ratios justifies raising position sizes / risk...

Click to expand...

Atilla,

I hate to state the obvious but percentages don't work that way...at all. I get the impression many traders don't understand % otherwise there wouldn't be any talk of increasing or decreasing the size of trades as the account grows.

1% risk does not give you 100 attempts at guessing the market direction...it gives you more than this, around 160 losers in a row base on the figures of £10,000 with a £2000 margin

5% does not give £500/trade and 20 attempts. If you lose on your 1st trade then you calculate 5% of (10,000-500)= 5% x 9500 = £475 on the next trade

Conversely if your 1st trade is a winner and you win £1000, then your next trade is 5% x 11000 which is £550.

Now, if you have £10,000 and must maintain a margin of £2000 then you can lose £8000.
At 5%, this means more than only 20 losers in a row, you can have 32.

A/c.................... 5% Trade Risk

10000.00.................... 500.00
9500.00.................... 475.00
9025.00.................... 451.25
8573.75.................... 428.69
8145.06.................... 407.25
7737.81.................... 386.89
7350.92.................... 367.55
6983.37.................... 349.17
6634.20.................... 331.71
6302.49.................... 315.12
5987.37.................... 299.37
5688.00.................... 284.40
5403.60.................... 270.18
5133.42.................... 256.67
4876.75.................... 243.84
4632.91.................... 231.65
4401.27.................... 220.06
4181.20.................... 209.06
3972.14.................... 198.61
3773.54.................... 188.68
3584.86.................... 179.24
3405.62.................... 170.28
3235.34.................... 161.77
3073.57.................... 153.68
2919.89.................... 145.99
2773.90.................... 138.69
2635.20.................... 131.76
2503.44.................... 125.17
2378.27.................... 118.91
2259.36.................... 112.97
2146.39.................... 107.32
2039.07.................... 101.95
1937.11.................... 96.86

Few! just log on, lots of post considering I only open this thread last night. However, its good to see .Its over looked by a lot of traders.

Yes, new_trader.That is the correct way to use perceages on ones account.If you look at the plan a drew up up post 1. its the same kind of thing, decressing your lot size when wrong.

yacarob1 said:

Q7. How much of my base trading capital am I prepared to risk on any one trade ?
A7. 0.25% or US$ 125.

Ok, so if I do 8 trades, I know that I will probably lose 3 of those and incur losses of US$ 375 if I let my stops get hit.

So, in order to achieve my daily target of US$1,000, I need to make US$ 1,375 from the other 5 trades, or an average of US$ 275 per trade.

With a risk level of US$ 125, I therefore need to achieve a R/R ratio of only 2.2 on those 5 trades….something which has proved to be well within my capabilities.

A position size of 500 shares with a stop of 25 cents will get me there comfortably and without too much stress or headaches.
.

Click to expand...

Ok, you say you risk $125 per trade = 25 tick stop....that would be$5.00 a tick....The first 3 trades go down, so you lose $375. you have 5 trades left to make 1,375. You would need to make 275 ticks on the next 5 trades to achieve your target. This would be 55 ticks on each of the next 5 trades....

Even on a good day with 8 winning trades, you would need 200 ticks a day to achieve your daily target. Are you sure you got this right?

laptop1 said:

Few! just log on, lots of post considering I only open this thread last night. However, its good to see .Its over looked by a lot of traders.

Yes, new_trader.That is the correct way to use perceages on ones account.If you look at the plan a drew up up post 1. its the same kind of thing, decressing your lot size when wrong.



Ok, you say you risk $125 per trade = 25 tick stop....that would be$5.00 a tick....The first 3 trades go down, so you lose $375. you have 5 trades left to make 1,375. You would need to make 275 ticks on the next 5 trades to achieve your target. This would be 55 ticks on each of the next 5 trades....

Even on a good day with 8 winning trades, you would need 200 ticks a day to achieve your daily target. Are you sure you got this right?

Click to expand...

Whilst money management is fundamental I think a trader should be thinking in terms of pips/points and ticks rather than in dollars and pounds. I think Dollars and Pounds obscure what is going on behind the scenes. Using the ES contract, A trader who consitently makes an average of 1 point per trade may be doing far better than a trader who makes an average of $1000/day.

No mention of post #1 Can anyone tell me what they think of the sizing plan and would they use it?