Position Sizing question

What should be the appropriate position size taken?

I trading demo account and am getting some good pips. But I think I am being too conservative because I am not getting enough $s. At the same time, I tried out accounts where I traded larger amounts, they have too large a drawdowns. Its ok on a demo account, but it will severly strain in the real account.

Can the pros here tell me what are you trading? How do you manage and balance these risk-reward? Are there times when you go big-lots?

Thanks very much for your answers,

Hey,

Let me start by saying position sizing & money management is one of the most important aspects of trading, so its good to take some time to fully understand what you are doing.

As a general rule of thumb, you should not be risking anymore than 3% of your account on any single trade. Even 3% is highly aggresive when starting off in this business. I personally suggest you start of risking only 0.5-1% of your equity per trade, and only start increasing your risk per trade once you become consistently profitable. This will not only protect your equity while you learn how to trade, it will also allow you to condition yourself psychologically to handle the drawdown/loss/risk.

A lower risk profile will also have a tendancy to assist with your trading discipline when starting off. A common mistake is to take a large position size, and close it prematurely not allowing your trades to follow the plan due to psycholigical pressures of having larger positions.

That said, the first thing you need to know before deciding your position size is:

1. Entry
2. Stop Loss Position
3. Take Profit Position
4. R:R ratio
5. Average expected success rate of the system being traded

All these factors play an important role. The later two especially when you begin to build up a track record and statistics of your trading system, allowing you to 'fine tune' your money management and position sizing.

Very basic Example
Account Balance: US$10,000
Pair traded: EUR/USD

Risk per trade: 1% roe
$/value risk: $100

Stop Loss: 40pips

So to calculate the position size needed for risking 1% over 40pips:
($100/40) = $2.5/pip or 25,000units, 2.5minilots, 0.25lots


But once you begin to gather data on the probability of success, and R:R ratio, you can then increase your risk to something more suited to the statistics of the system.

back to your question
You might not be getting enough $$$, but don't focus on this, as it is largely dependant on your account balance. Focus on %Return on Equity or %DrawDown, this is what matters in the long run.

Making 10% a month is an absolutely awesome return on equity. But on a $1000 account this only means $100. But on a $50,000 account it is $5,000. Bottom line you can't expect to make a decent living with a small balance, but that does not detract from the fact that ROE is ROE! which is what really matters in the long run.

Personally I mainly trade EUR/USD & AUD/USD. My position sizing varies depending on the pair I trade and the type of trade taken (scalp/swing etc).

When scalping or intra-day trading for 20pips EUR/USD my position size is 5x balance and sometimes as much as 10x balance. The reason for this aggressive money management is I know the probability of the system I am trading and so an aggresive strategy pays off in the long run. On a swing trade, I only got in 1-2x balance.

So yes there are times I go in big lots, the decision to go in big depends on the trade setup and probability of success of the system. In my opinion it is easier to predict a 20pip movement with high accuracy than a 100pip movement. So i personally prefer to go in heavy with precision, but that is plainly due to the system I trade & the expected success rate.

If a trade presents itself that has a lower success rate, Price Action not looking favourable etc, then I will have no issues taking a tiny position of only 0.5-1% (i.e risking 0.5-1% of my balance over 100pips).

bottom line
Yes there are times I go in heavy. But at the end of the day my stop loss is in place such that I will never lose more than 3% of my balance in any single trade, worst case scenario. The main thing you need to know is the expected outcomes of your system, in order to fine tune position sizing, and perhaps most importanntly ability to read the PA.

Hope it helps...

G'luck trading

fxdanny4x, what a great reply. I can only add a couple of points:

The power of compounding: So, even trading small percentages, your account will grow faster than you can imagine.

Psychology: If you over-leverage and fail, you may lose faith in yourself. Trading 1% or less and with the knowledge that you could easily have a string of losing trades, it's comforting to know you can afford it.

Thank you Fxdanny this is a great piece of advice.

The main problem I am facing in trading (demo) account is the minimal profits that I make are really not making any money. As Larry Williams says, you have to take risks in this market. But whenever I take positions (which I am currently testing what would be the optimum size) I am more likely to blow the account or drastically reduce the size of account - which puts me back to sqaure one.

Frankly, this is a chicken and egg situation for me. If I take risk, I could blow out and if I don't, it strains me psychologically.

I just feeling the waters as where should the tipping point should be in terms of numbers of lots you can take.

Regarding the bigger lots, I request you to please share with me some insights on how to ensure precision. I do not trade on a mechanical system hence I cannot backtest or arrive at max % drawdown. I am basically a trend follower so, it has very good degree of success.

Any more thoughts on position sizing in the above view and making trades more precise for taking bigger lots would be greatly appreciated.


Thank you.

Well the answer is only what you would imagine it to be. You have to be patient and wait for only the best set ups. Do you know which are the best set ups? Playing the game with very low leverage is the only way to get a feel for this.

As soon as you over leverage massive psychological pressure comes to bear and you will make poor trade management decisions. The only way around it, I suppose, is to set a trade and walk away until you're sure there is an outcome.

This isn't what you wanted to hear. Tough.

Keep it simple.

If you have at least nine more chances after your loosing trade. you are good to go...

What you need here is the system which has at least 50-50 chance to win.

The system should include your personality/emotion...

from nobody

Nice post by fxdanny4x!


I made a simple table to consider the expected value of a trade, which consists of winning % and risk:reward. So as long as the trade has a positive expected value, I'll go with it. Really depends on your system and personal preferences but so as long as you are taking trades with positive expectation, profits will come!

Risk reward


Makes good sense when you know where price is going, right?


Trade the 2/3 and 1/3 ratio, check posts and it will make sense



Red

It would seem to me from reading this that you are undercapitalized and over-leveraging yourself.

No single trade should set your account balance into such a bad state of repair. As mentioned before I risk a maximum of 3% or equity on an given trade. I have been trading for over 5years now, and fulltime for well over 2.5years and this is my maximum risk threshold per trade.

In my opinion the best thing you can do for yourself is pick a fixed leverage profile of either 0.5x or 1x account balance. Use this position size for EVERY trade, regardless of wether you have a 40pipSL or 60pipSL (0.40%risk & 0.60%risk of balance respectively), for a minimum of 1 consistently and disciplined profitable month.

Next month, Ammend your position size on a per trade basis, this time keeping your %risk fixed, regardless of your Stop Loss. I.E if you have a 20pip, 30pip or 60pip SL you will have a fixed loss of 1% (or whatever figure you chose). If you lose this month, it means you haven't got an understanding of where to place your SL yet or reading PA, and you should go back to how you traded the previous month with a lower risk profile.

Once you have done 3 or 4 consecutive profitable months of consistent disciplened trading then you will know for yourself the ins&outs of your trading setups and the profitability factors, and be able to 'fine tune' your leverage/position sizing on a per trade basis.

Also know where you are going with your trading, thinking you are going to make a million dollars is fine and you certainly can if you are focussed, but what are you going to do to get there today, is what matters. Sit down and do some maths and play around with figures etc.

god speed

My thanks for you pointing way of good MM.

Special thx to Jliuuu for providing that table. I thought I could use that...

Be organic about it. Don't blow your entire account obviously, but when you have a strong entry I believe in throwing your weight on it. (Of course this might mean you have to have to fine tune your stops.) Meaning trading a strong lot or unit size. Winning big when you win means less exposure, exposure is what kills a spot trader.

So, are you going to tune your entries? Or tune your money management? Is the question. Do you have good entries? Do you wait for what may be the best price according to your system? What time frame are you trading off of? What are the stop loss requirements of your time frame?

I don't believe in position scaling as much however because it doesn't work for me, I don't believe in multiple entries either as the market can turn and your second or third entry can eat up a good first and or second one. Do or die on your first entry IMO.

Also, personally, once I was confident with my entries I found that taking a strong position made me less greedy for overall "pips." Basing my trades not on some arbitrary amount of pips I want to score, that the market might just not give, but value based off my position size. I stopped throwing away 50 pip moves and breaking even because I wanted 100, 20 because I wanted 50, etc.

Of course the downside to this means my losses are bigger than they used to be, but they are still proportionally smaller than my wins. So it all comes down to your strategy of personal money management finesse, and trading expectancy. The key is keeping your proportions correct.

And, cut cut cut those losses. The most important aspect of trading that can only be learned through experience; is learning the difference between a drawdown and a loss. And it's all relative, only you can tell the difference for yourself. I think we're all constantly in the process of honing this skill. As your needs and expectations evolve as your trading skill and account grows.

That's my opinion about the matter anyway.