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How do YOU determine "Position size"?


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How do YOU determine "Position size"?

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  #1 (permalink)
 Fourwedge 
Kansas City MO
 
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I have been trading stocks in and out of my retirement funds for several years. Just recently I have started a cash acct and began to swing trade and even day trade. I have read as many books as I could get my hands on and practiced quite a bit on TOS.... and just recently joined this forum. I am finding so much valuable information. But something is eluding me.

In my account that I am day trading out of, what should my position size be (assuming I will NEVER hold a position overnight)? Or should I look at it a different way?

Should I look at it as how much am I willing to lose on any single trade if I get stopped out. BTW, I always use stops.

I've read and heard it many places to "risk" 1 or 2 % per trade. By risk do you mean the amount you would lose if the instrument goes to ZERO.... or is that the amount before my stop loss. If someone is trading using only $250 as their position size, commisions (unless you are buying penny stocks) are going to be very hard to overcome.

One method I have heard that made a lot of sense to me was take the amount that you are willing to lose on any single trade...say $100 and divide it by the ATR of the stock. So if its atr on a 3 min chart is .05... you would divide your risk amount by the ATR or ($100/.05) you would purchase 2000 shares and your stop would go at the bottom of one candle or .05 away from your entry price.

Personally even a $250 loss seems like too much on a single trade for me.... am I crazy?

any thoughts and input into my first thread are appreciated... I enjoy this forum imensely!

Fourwedge

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 Fadi 
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 monpere 
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Look up Van Tharp's Position sizing using R-Multiples. The R-Multiple concept will explain a lot of your questions.

R-Multiples
Position Sizing

Also the following indicator in the futures.io (formerly BMT) download section can help you automate this process on your charts.

TradeRuler

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 Tradervue 
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I'd second the R-multiple method for position sizing. One thing I'd add is for intraday traders, where you will be flat by the end of the day, there are still two things that could happen to you:

1. Your stock gets halted, and could gap through your stop when it reopens

You can usually predict when this might happen (e.g. biotech announcements, etc), but not always. I've been stuck in a stock that was unexpectedly halted, and it's not fun.

2. You are unable to execute an exit order near your stop price

If the market is moving fast, and/or there's not a lot of liquidity when your stop hits, you might execute a long way from where you were planning. Worst case is a flash-crash scenario, but even in "normal" times I've personally had stop-market orders execute 0.50 worse than I had planned (on a normally liquid $50 stock). If you thought you had 0.10 of risk on, and you stop out for 0.50, it's ugly.

So try to be realistic about how much risk you really have on - it's more then just where you place your stop, but also about where you think you'll realistically be able to exit.

I'm not saying the above should necessarily affect how you size your positions - just saying it's worth having these things in the back of your mind, and understand how you will deal with each without panicking in the moment!

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  #6 (permalink)
 Fourwedge 
Kansas City MO
 
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gr2020 View Post
I'd second the R-multiple method for position sizing. One thing I'd add is for intraday traders, where you will be flat by the end of the day, there are still two things that could happen to you:

1. Your stock gets halted, and could gap through your stop when it reopens

You can usually predict when this might happen (e.g. biotech announcements, etc), but not always. I've been stuck in a stock that was unexpectedly halted, and it's not fun.

2. You are unable to execute an exit order near your stop price

If the market is moving fast, and/or there's not a lot of liquidity when your stop hits, you might execute a long way from where you were planning. Worst case is a flash-crash scenario, but even in "normal" times I've personally had stop-market orders execute 0.50 worse than I had planned (on a normally liquid $50 stock). If you thought you had 0.10 of risk on, and you stop out for 0.50, it's ugly.

So try to be realistic about how much risk you really have on - it's more then just where you place your stop, but also about where you think you'll realistically be able to exit.

I'm not saying the above should necessarily affect how you size your positions - just saying it's worth having these things in the back of your mind, and understand how you will deal with each without panicking in the moment!


Thanks for the articles. Both are good reads.

Food for thought.

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Last Updated on November 8, 2012


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