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?

    Comments appreciated.
  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.

  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