Position size & Money management..

Discussion in 'Risk Management' started by PohPoh, Jun 27, 2007.

  1. Lets say that I have a 100K account
    and I want to risk 1% per trade...

    Lets say a setup arises whereby I can buy 1 contract and risk 1000$, or I can buy 2 contracts and risk the same 1000$...or I can buy 5 and risk the same $1000...

    Obviously stops are going to be 5 times closer on the 5 lot than on the 1 lot. How much more likely are you to be stopped out than on the 2 lot or the 1 lot?

    Seems to me that the most important thing of all is how well placed your stops are..?

    I guess I'm just wondering what's preferable...

    what has worked best for you...?

    Small positions and wider stops, or, larger positions and tighter stops?
  2. Tighter stops with more contracts require a cleaner entry. If your entry point is sloppy you will need a wide stop. Also with volatility coming back now, you'll need a wider stop to stay in. This also depends on the vehicle you trade.

    Like theoretically you can do 1000 but a 1 pt move will take you out. It's up to you to access your entry point and where the stop should be placed, and using that distance to factor the amount risked and calculate how many shares you want.
  3. 1) low risk trades the stops are less likely to hit.
    2) low risk trades price slippage is extremely one way, thus stops are less likely to hit.
    3) price slippage one way is secondary market being onesided in sentiment. Meaning the market is tilted by the smallest money pools on the wrong side of the trade.
    4) small money pools are usually weak handed and overleveraged.
    5) large money pools can harvest the small money pools, the total aggregate being much larger and worthwhile.

    Thus if your worried about your stop being hit, you shouldn't place the trade.
  4. Similar to what someone else said, you have to compare your risk tolerance to the volatility of the market you're trading. Start with smaller position size and then increase it as you get comfortable with the equity swings.
  5. I think you should have a fixed rule for placing the stop, like a volatility based rule , but the need for standardization is clear...

    In other words, the only thing you should be able to control is size.

    And having that, there is a simple calculation based on risk in points and risk of account that should give you the position size.
  6. For instance, in my swing trading i like to use an EMA Channel, and for instance if i go long, i usually place the stop halfway between the lowest point of the pullback and the lower channel line, and i target the upper channel line.

    Now, the lower the retracement goes without invalidating the setup and the lower i can enter the trade, the more contracts i trade. But, in those cases, the trade feels iffy. And most traders are reluctant.

    Ace Greenberg said something about the fact that the best trades were the ones that almost turned his stomach upside down :)
  7. Contracts?

    You are trading options, right? If so you will be risking much more than 1%, because of leverage. Even the bid/ask spread is larger than 1%!
  8. What?
    what options are you talking about...
    Corn options b/a is 25$

    I'm talking futures...
  9. Even with futures you will be risking more than 1% in almost any trade, again due to leverage.
  10. ================
    Let say you buy 1 ES contract;
    no need to risk $1,000, [that wide a stop =wasteful.

    Popo, and lets say you dont buy 5 contracts till you have proved youirself, much more to trading than simple math.

    Less is more;
    wait till you have proved yourself:cool:
    #10     Jun 28, 2007