Which position size to trade?

WHICH POSITION SIZE TO TRADE?

Position size is a crucial element of trading, as it determines how much of your capital you risk on each trade. Managing your position size effectively is essential to maximizing your chances of success and minimizing your losses.

THE IMPORTANCE OF RISK MANAGEMENT

In trading, risk is omnipresent. Technique may give you a slight advantage, but the results are often unpredictable. That's why it's crucial to control your risk by limiting the size of your positions.

DETERMINING POSITION SIZE

1. Risk per transaction

Most traders recommend risking around 1% of your capital per transaction. This limits your potential losses and keeps you solvent over the long term.

2. Stop loss

The stop loss is an essential tool for limiting your losses. Define your stop loss before entering a position and calculate the size of your position according to your stop loss and the risk you wish to take.

3. Example

Let's say you have €5,000 in capital and want to risk 1% per trade. If you buy a share at €100 with a stop loss of €95, you can buy 10 shares because €50 (1% of €5,000) / €5 (difference between purchase price and stop loss) = 10.

PROTECT YOURSELF AGAINST SERIES OF LOSSES

1. Consequences of a series of losses

Losing several trades in a row can have a significant impact on your capital. It is important to be prepared for such situations, and not to increase risk in an attempt to compensate for losses.

2. Recommendations

Start with a substantial capital and a risk of 0.5%.Trade only if you have more than €5,000 to risk.Do not increase your risk to compensate for losses.

APPROACHES TO ADJUSTING POSITION SIZE: CONSTANT AND PROPORTIONAL APPROACHES

1. Constant position management approach

Risk a constant percentage of your initial capital on each transaction, regardless of how your capital evolves.

Advantages: Simplicity of implementation and limited risk of ruin.

Disadvantages: Limits potential gains in the event of a series of victories.

2. Proportional approach to position management

Recalculate the risk with each new transaction according to the evolution of your capital.

Advantages: Increases potential gains in the event of a winning streak, and adapts risk to capital growth.

Disadvantages: More complex to implement and increases the risk of ruin in the event of a series of defeats.

3. Recommendation

The constant approach is generally recommended for novice traders. The proportional approach can be used by more experienced traders who understand the risks involved.

CONCLUSION

trading and position size are linked. Managing position size effectively will maximize your chances of success and minimize your losses. It's important to choose an approach that suits your risk profile and trading objectives. The more you lose on your capital, the higher the percentage gain required to get back to the initial position.