47. Why Position Sizing is So Important in Trading

http://www.informedtrades.com/
A lesson on why position sizing is one of the most important aspects to consider when trading the stock, futures and forex markets.

So far in the lessons leading up to this one we have covered some of the different methods traders use to pick their entry points, as well as some of the different methods which traders use to set their exit points. In this lesson we are going to look at the factor which ties all of the above together and allows a trader the greatest control over their returns: Position Sizing.

While position sizing is one of the Key components of successful trading, like many of the other things we have covered, it is often overlooked as an unimportant aspect of trading. What successful traders know however is that once the psychology of trading is mastered and a trader has developed a sound strategy for picking their entry and exit points, it is the method they use to determine the size of the positions they trade that is the final factor which will lead to their success or failure.

To help illustrate this lets say that three traders are each given $10,000 and the same EUR/USD Mini Forex strategy to trade which has a win rate of 60% (makes a profit on 6 out of 10 trades) and makes an average profit on winning trades over the long term of 100 Points. On the losing side, this same system has a lose rate of 40% (takes a loss on 4 out of 10 trades) and takes an average loss on those trades of 90 points.

So here we have a trading strategy that has more winning trades on average than it does losing trades, as well as a strategy that when it does lose it loses less than what it does when it wins. I think most traders including myself would take that system any day of the week.

So we give these traders each this system and tell them to come back to us after 10 trades and show their results. As the system is the same for all traders, when they bring us back the trading results of their systems the entry points and exit points for each trade is going to be the same, leaving them only the position size as the factor that they can tweak.

As they are trading mini EUR/USD forex contracts the value of a 1 point move is $1 per contract traded. With this in mind after 10 trades the system produces the following results:

Category:

Howto & Style

Tags:

• howto
• trade
• position
• sizing
• daytrade
• investing
• money
• finance
• business
• forex
• futures
• stockmarket
• informedtrades

[elpatxi22]

Hi David. What's your forex trade system you usually use? Actually I'm trading EUR/USD & GBP/USD on the 5mn chart (i'm day trader), I i'm using Stoch Histrogram, Laguerre (0.6 & 0.8) & MACD in order to entry on the market. What do you think ??

Thanks

[InformedTrades]

Hey Elpatxi22, I am a swing trader that takes positions in the direction of the trend after the break or bounce off of a major support or resistance levels. I would need to know a bit more aobut your strategy in order to give my personal opinion. As the comment space is limited here if you would like to post over in the ask/answer question section of InformedTrades I will be happy to discuss this with you further there. Best Regards,

Dave

[supasonic128]

Great video. Trader 3 sounds a lot like me a few years back. This is definitely a video I will show the new trader that come to our firm, explains a lot in just 3-5 slides. Keep up the great work!

[InformedTrades]

thanks for the comment glad you like the videos and best regards, Dave

[SOHidands]

My pal used this forex method called: Effectus Forex Strategy and recieved about 350 pips in a month or two without working!I'll probably google about it

[fxmadeasysg]

today's forex training

[hotaggie98]

David, I think that you need to actually have an account balance in each calculation in order for it to make sense because if you start out with a loss then in order to make up the same amount (trader 2) you might have to go into higher risk. He might not be able to make that kind of return after a few losses. Just my experience

[purplepatchforex]

great video, again, but if your system is 100% consistent risk/reward, your position sizing can be 100% consistent

[A550RGY]

For clarity, Trader #1 risked 5% of his total account in each trade, while Trader #2 risked 10%. Trader #3 risked a ridiculous 90% on each trade... that's just insanity.

[ALBIBBE]

comment me back

I NEED SOMEONE TO TALK TO i4

[wojtek0000]

Trader 3 went balls against the wall. ha!