Position Sizing

Position sizing could very well be the most important aspect of a trading system, yet, like expectancy, it’s rarely covered in trading books. A position sizing model simply tells you ‘how much’ or ‘how big’ of a position to take. Position sizing can be the key factor in whether or not you stay in the game or whether your gains are huge or minimal.

Dr. Van K. Tharp did an experiment which shows the importance position sizing. In his book “1R risk across all trades which helps in my expectancy calculations.

Here are some position sizing resources:

Comments

  1. Posted by TheArchitect on July 5, 2005 at 1:36 am

    A very interesting subject, and one that i never gave much thought to before. Now that I am becoming more systematic in my trading I will definately investigate this aspect more. Thanks for the great article!

  2. Posted by carlo_trader on July 5, 2005 at 1:08 pm

    Among the questions a trader has to answer those of risk management and moneymanagement are the most important. Risk management is about placing an initial stop. This determines the risk in a trade. Moneymanagement is about controlling the size of a trade.

    With a fixed percentage both questions collide to one question because the initial stop determines your risk and therfore your size.

    See also http://radio.weblogs.com/0142482/stories/2004/11/27/DAX-tradingsystem.html

  3. Posted by David Jackson on July 5, 2005 at 5:46 pm

    Mike,
    This is a terrific post. Very interesting.

  4. Posted by Stuart Barnes on July 6, 2005 at 11:15 am

    Mike,

    That section on position sizing that you paraphrase got my attention too. I am now just starting to employ a position sizing algorithm that uses a 10day ATR to determine the degree of volatity in a stock, and a factor of 3 on that to determine my stop. I then calculate the position size based on a 1% equity risk.

    What has surprised me is that some of my trades have increased in size quite dramatically, while I have decided not to trade others I would normally have, as the position size was so small. It has also made me reduce the number of stocks I am holding.

    I will let you know how it works out.

    Keep up the good work.

    Stuart

  5. Posted by Technicator.NET on October 9, 2005 at 5:01 pm

    I’ve started using position sizing and in the beginning feel a bit reluctant to shell out so much cash and invest it into a stock even though the stop is very tight and the loss risk is calculated into the position size. Position sizing is not magical because it stil requires the identification of where the stop would be and screwing up on this part would lead to a quick defeat (loss of money). So I think position sizing is best suited for the experienced in day trading and definitely helps make money fast.

    Just like trading with any other strategies, inflate position size when the stock goes your way, and cut loose when it goes against you. This way, you rake in profits when it works and minimize losses when it doesn’t.

  6. Posted by Michael on October 9, 2005 at 7:54 pm

    You lost me. How can anybody trade without some kind of position sizing? How would you ever decide how much to buy/sell?

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  2. What about Position Sizing?

    Michael from TraderMike.net references an interesting study by Dr. Van K. Tharp about another important side of trading – position sizing.

    A position sizing model simply tells you ‘how much’ or ‘how big’ of a position to take. Position s…