No matter if you have world’s best strategy by your side, will surely fail if position sizing is not defined properly.
At the same time a robust money management can make miracles in long run with ordinary methods. Big hedge funds already proved that. Risking too much money can wipe out capital in matter of no time.
Your position size is the number of shares you take on a trade. Your total risk is broken down into two parts—per trade risk and account risk. You should have a good understanding of how these elements fit together. This will give you an ideal position size, no matter what the market conditions are, what the trade setup is, or what strategy you’re using.
Think about it, you make killer trade with very small position.
You take a loss on single trade when position built was very huge.
In both cases efforts are fail but when it comes to second scenario where you take abnormal risk it can be more painful. If you get your position sizing right you could start making significant profits.
This I learnt in hard way with my personal experience and is the reason I want to share some tips with you.
Start maintain trading journal and mention each and every trade detail (trading quantity and stop loss from entry level is must)
What are your main setups (higher probability setups) where you can trade with more risk when they appear.
Same time also take note if setup is not your best one ultimately you need to reduce position size significantly.
Determine your daily max losses. No matter what if hits the limit. Make sure you are no more available in front of the screen to trade.
I am not saying you should have strong mathematical skills but at least start thinking in percentage (%). Percentage wise gain and loss on particular trade and on entire capital as well.
You don’t need to be always right as few good trades will turn story upside down in your favor with well-defined risk
After start seeing a steady progress you can scale up accordingly as scaling up is another monstrous task.
Position sizing rule:
Never expose more than 2% of your capital on one trade.
If you follow this rule, you need 35 trades going to loss in a row to wipe out your 50% capital
Why it is important to have a proper position sizing method to trade consistently?
By maintaining proper position enables your trades consistent. Which leads in steady growing trade account and some how sideline huge volatile sessions if u apply it properly.
My thoughts to take away
Don’t keep position too low as u can’t see potential growth in your capital and not even too big which can deplete your capital very fast.
Anything near 1% or less than that risk on your capital is good risk so deploy as per your risk appetite.