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# Position sizing question

Discussion in 'Strategy Development' started by og5, Feb 24, 2006.

1. ### og5

Often on this forum I see that guys suggest not risking any more than 1% of account size on a trade. This figure seems far too conservative to me. Ok, I understand that trading so small has psychological advantages as well as minimal risk for busting an account, but how are you going to make money? Lets say I had \$50,000 to start (which is actually 5 times what I have) 1% of that would be \$500 a position. I can't give numbers for a daytrader, but a swing trader would have to do 20 10% gains and no loses each month to make a "decent" 2% a month. I must be missing something because trading on 1 or even 2 percent of one's account sounds like a waste of time. Why not 5-7% on a trade?

2. ### lakka

ahem...your maths is abit off

simple example:
500\$ risk , 2:1 Risk reward. 50% Hit ratio.
For each 500\$ risked you gain 1000\$.
20 trades , 10 Losers and 10 winners.
I'll leave the rest of the math to you.

Using say 7% , 3 losers in a row and you have 20% drawdown.
Some mistakes more and you have 50% drawdown.......then what the heck lets go all in to make it back......

Edit: aah might be that you misunderstand, it is not 1% of shares of total equity. It is the dollar risked. So if a stock is at 50\$
you do not buy 10 shares to get to 500\$ risk.
You determine where your stop are and buy the number of shares accordingly. Say stop 2% away. That is 1 point on a 50\$ stock, 500\$ Risk, you buy 500 shares. If goes down 1 point you have 500 shares, you exit at 49 and lost 500\$.

3. ### inCom

You're mistakenly assuming that RISK and POSITION SIZE are the same. This is not what is usually intended.

To say that you have a 1% risk means, generally, that whatever your position size is, you will close it when it goes against you more than 1% of your total equity. So for example you open a position of 10% your equity, 5k in your example above: if you set your risk to 1% you will close it if and when you've lost \$500.

GS

4. ### acrary

If you use a method with a profit factor of 1.5, risk 1% per-trade, and do 20 trades per-month, the average uncompounded return is 10% per-month.

5. ### AshanD

Ok makes sense now, thanks

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