Article Position Sizing as an Approach to Risk Management

[T2W Bot]

Many beginning and intermediate level traders may benefit from learning a new approach to risk management which I intend to discuss in this article. There are two types of trader that this may apply to and the first, (Trader A), is the one who enters a trade with a stop set at a fixed distance away from their entry and it is always the same distance regardless of the market or instrument being traded. Trader A places a stop entirely based on a fixed monetary risk and when the amount of money that they have set aside for the trade has departed their account they close the trade.The second trader, (Trader B), places a stop that can vary in distance from their entry and is based on “Technical” reasons as to why the trade is no longer valid. In both cases the traders use a fixed amount of money per pip or per point of price movement and can be anything from 50p to £100 or more depending on their account size.
This simplistic approach has problems in both cases. For Trader A there is no...

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[superfly]

Lets look at trader X

He has a maximum risk tollerance per trade of lets say $100 of capital and a fixed position size.
The fixed position size is based on the maximum risk tollerance.
If the maximum tollerance for 100 shares is $10, trader X will always trade 1000 shares.

One boundary condition to enter a trade is that the stop can vary in distance from the entry, based on “Technical” reasons as to why the trade is no longer valid, but this desired stop is always less or equal to the defined maximum tollerance for risk.

Trader X knows his:
-maximal risk = $100 (excl. slippage and transaction costs);
-size = 1000 shares;

And he enables himself to outperforme his maximum risk by also selecting technical valid trades that have less risk than the $100.

 

[Mr. Charts]

Excellent article, pitched at the right segment and expressed clearly and concisely.
A good example of the standard that should be on Knowledge Lab., or whatever it's called these days.
Richard

 

[pedro01]

I thought it was an interesting article.

Very much what I do when I position size. Newbs should take note.

I'd like to see more on risk management though.

 

[Charlton]

Good article which goes into more depth than most of the articles normally delve in the Knowledge Lab. I think it will help newbies start to consider different approaches to both stops and, perhaps, to really consider position sizing for the first time

 

[Elliot25]

Great article, that's is one of the better explinations of the use of ATR that I have seen. Kind of finny that two of the trades I placed today were examples of Trader A and Trader B. One was stopped out to early and the other made money and is still going.

 

[foroom lluzers]

What if extreme volatility breaks out , comes to your stops ,takes it out and goes in your intended direction without the trader?It happens quite often!

What if the market makes a monkey out of tight stop scared money traders?