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Proper Trade Sizing
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Proper Trade Sizing

  #1 (permalink)
Trading Apprentice
Raleigh, NC
 
Futures Experience: Intermediate
Platform: MB Trading
Favorite Futures: Stocks
 
Posts: 2 since Jun 2012
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Proper Trade Sizing

To determine my trade size I am using the formula:

Risk - Commission / Difference between entry and stop

I have a 50,000$ account and using a 1% risk so my formula (when trading JNJ) looks like this:

$500 - 4.95 / 0.47 (based on average ranges I use). This gives me a trade size greater than 1,000 shares which would be $60-$70k. It is a margin account but this seems a strange. How do you deal with this?

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  #2 (permalink)
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  #3 (permalink)
Elite Member
las vegas
 
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Who says you have to risk 1%? I would start out risking $50 to $100 per trade and see how that goes first

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  #4 (permalink)
Trading Apprentice
Washington DC USA
 
Futures Experience: Beginner
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Position size

Forexcalc.com has an easy to use calculator for position size and risk assessment, great for forex traders. As far as position size, professional traders recommend 1-4% of your total account size. This way you can take a few losses without blowing up your account, live to fight another day.

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  #5 (permalink)
Elite Member
Dartmouth NS
 
Futures Experience: Intermediate
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bnichols's Avatar
 
Posts: 638 since Feb 2010
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The formula says nothing about share price since it uses price difference, hence all it tells you that if ca. 1000 shares of anything move $0.47 against you then the loss is $500--it does not say whether you can afford to own those 1000 shares.

For example, you could easily afford 1000 $5 shares, for which a movement of 47 cents amounts to a huge 9% change in share price, but not 1000 $500 shares for which a 47 cent change amounts to change of 0.09%, even though in both cases you would be down $500 if share price moved $0.47 in the wrong direction.

On the face of it, given a $50,000 account, an arbitrary 1% risk & the 47 cent stop constraint the costliest stock you can afford is $50 / share.

One solution is to assign a perhaps equally arbitrary account risk based on the stop expressed as a percentage of stock price. I.e., 47 cents is about 0.68% of 68.55 (JNJ closing price), so using 0.68% rather than 1% as the risk the formula becomes

N = (S*A - commission) / (S * P) = A/P - commission / S / P.

where
S = stop as a percentage of share price expressed as a decimal (i.e., 0.68% = 0.0068)
A = account size = 50000
P = share price

so that for JNJ and a $50,000 account

N = (0.0068 * 50000 - 4.95) / .47 = ca. 700 shares (total cost 700 * 68.55 = $47985).

In other words, when the stop as a percentage of price approximates the account risk percentage, simply divide your account size by the price per share to determine the number of shares :-/


Last edited by bnichols; September 19th, 2012 at 12:15 AM.
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  #6 (permalink)
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Bala, PA, USA
 
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monpere's Avatar
 
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Try this trade sizing indicator:

https://futures.io/download/ninjatrader-7/indicators/1248-download.html?view

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