Position Sizing Strategies, Control Your Risk When Trading

[vc_row css=”.vc_custom_1548058518349{margin-right: 20px !important;margin-left: 20px !important;}”][vc_column width=”3/4″][vc_column_text]Size really does matter in the markets! Position Sizing (a term coined by Van Tharp), tells you how much to risk on any particular trade. It is one of the most important concepts that any trader should know!

Watch this short video from Dr. Van Tharp about position sizing strategies and controlling risk.[/vc_column_text][vc_video link=”https://www.youtube.com/watch?v=QjFRVPWpEuY” el_width=”90″ align=”center”][vc_column_text]After you have watched this video, notice whether you think differently about any of the following:[/vc_column_text][vc_custom_heading text=”Importance of Position Sizing Strategies” use_theme_fonts=”yes”][vc_column_text]

  • Position sizing strategies tell you how much throughout the course of the trade
  • Their purpose is to help you meet your objectives whether that is:
    • To maximize your chances of receiving X%
    • To minimize your chances of having a drawdown as big as Y%
    • Or some combination of both
  • There are as many objectives as there are traders

[/vc_column_text][vc_custom_heading text=”Simple Position Sizing Strategy” use_theme_fonts=”yes”][vc_column_text]

  • Remember that your system is a distribution of R-multiples with a mean value equal to its expectancy
  • Position sizing strategies allow you to equate R across trades
  • Thus, through position sizing methods, you can make 1R equivalent to 1% of your portfolio through what I call CPR for traders
    • R = risk per unit
    • C = cash or total risk per position
    • P = position size or how much
    • Formula: P=C/R
      • Position size = cash/risk per unit

[/vc_column_text][vc_custom_heading text=”How to Use Position Sizing Strategies” use_theme_fonts=”yes”][vc_column_text]

  • Who are you?
    • A risk manager whose job is slow appreciation with minimal risk?
    • A speculator who wants maximum profits if at all possible no matter the consequences?
    • A speculator who wants outstanding returns with minimum risk
  • What are your objectives?
    • To attempt to achieve some objective such as make 100% in a year
    • To avoid some particular drawdown amount that you might consider ruin at all costs
    • To attempt to achieve your objectives while making sure you don’t have a particular drawdown
  • What’s your position sizing strategy
    • Risk a little more after each loss (eventually, a win will come)
      • This is a recipe for disaster but it is still a position sizing strategy
    • Risk a constant amount such as $100
    • Risk a percentage of your equity
    • Risk a percentage of your equity or a bigger percentage of your winnings

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