Day Trading Education

Position Size - Equal Dollar Amount Method

I've covered a lot of different topics in this website, but when it comes to your day trading education, this part on position size is probably the most important I've covered so far. I'll be going over expectancy as well, and that's another extremely important part of your day trading education as you'll soon learn, but lets cover position size first.

Your success as a day trader depends greatly upon understanding position sizing. Even if you design an excellent trading system, if you trade with too much risk on individual trades, you will eventually lose. It's not a matter of if it will happen, it's a matter of when it will happen.

If you're a beginner, do not make the following newbie mistake.

Let's say for example a newbie has $50,000 in his account and spots a stock, like the one below, making this nice triangle pattern and decides to place a buy stop order for a breakout trade. SBUX breaks out as planned and he's long with 2,500 shares at 28.02. He has his stop placed appropriately, price goes higher, he allows the trade to run and he eventually exits with a nice profit.

Example Stock chart


Great, he made some nice money on the trade, but what huge, amateur mistake did he make on the trade?

He put all of his $50,000 account plus margin on this one trade!!

What so bad about that, he made money didn't he? Sure, this time, but the reality is that these breakout trades, like most other trades, are going to fail at least half the time. That means you are bound to have some long losing streaks.

There's no getting around it. It's these long losing streaks that you have to plan for. It's also possible that a severe downward move can blow right past your well positioned stop and exit you far below it. Just another reason to practice proper money management.



EQUAL DOLLAR AMOUNT METHOD

I promised that this position sizing method would be really easy. So here it is:

Take that $50,000 and split it up into equal dollar amounts to make separate trades. For example, you could divide it by 5 and have five blocks of $10,000 each. Or, you could divide it by 10 and have ten blocks of $5,000 each.

If you're a novice, with a small account, I think the best approach would be to split the account into only five blocks, that way you at least utilizing a basic form of position sizing, and at the same time not having to concentrate on too many trades. Keep it simple for now and when your account gets bigger and you have more experience, you can divide the account into more blocks and trade more stocks every day.

If you decided on 5 blocks of $10,000 each, then in the previous example chart, you'd only buy 350 shares of SBUX.

10,000 / 28.02 = 356 (rounded down to 350 shares)

You could then find four other stocks to trade that morning with the remaining four -- $10,000 blocks. I've made the assumption here that as a beginner, you will not be trading with margin yet.

See how simple that was? Your day trading education is just getting to the good stuff. Lets move on to the Equal Risk Method for stock market day trading next.