Trading Money Management Position Sizing
My goal for this page on trading money management, otherwise known as position sizing, is to keep the explanation as simple as possible and to use charts to make it easy to understand.
POSITION SIZING ... WHAT THE HECK IS THAT?
While position sizing is probably the most important part of any trading system, along with expectancy it is probably one of the least understood trading concepts. But the truth is, it's really very simple.
Basically, it comes down to this for the trader. No matter what amount you have in your trading account, and no matter how good you think you are at this business, if you have plans to trade the full amount of your account on only one stock, in the long run and probably sooner than that, you will eventually have to close your account due to losses.
Why? Because every trading system, no matter how good, has losing streaks. That is a universal law, sort of like gravity. The whole purpose of position sizing is to get you through these losing streaks, so that you can take advantage of the positive expectancy of your trading system(s).
If the size of your trade is too high for your account size, you are risking too much money, and eventually the market will distribute your hard earned money to traders that understand
Ok, so you're not going to do that right?
Let me be very clear, trading money management or position sizing, is not about initial stops or exits or trailing stops.
I've already covered those topics. Position sizing is only about HOW MANY. Since were talking day trading stocks here ...... how many shares of a stock to trade. That's it!
To keep things simple throughout the rest of this discussion on trading money management, we'll leave commissions out of the
picture and we'll say that you have a nice round amount of $50,000 in your trading account for example purposes.
I'm going to show you two different trading money management methods. The first is so simple a 1st grader could understand it.
The second one, although still pretty simple, requires a bit more detailed explanation. But, it does a better job managing your risk.
TWO POSITION SIZING METHODS FOR DAY TRADING STOCKS
1) Equal Dollar Amount Method
2) Equal Risk Method