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:
- Van Tharp’s books are by far the best work I’ve seen on position sizing, expectancy and money management. I’ve read “Trade Your Way to Financial Freedom” and “Financial Freedom Through Electronic Day Trading” and recommend both highly.
- Money Management or Position Sizing or Bet Size… No Matter What You Call It, Better Know It
- Michael Taylor on his position sizing trials.
- Stephen Vita on his position sizing model.
- Jon Tait’s argument for trading many small positions. (I don’t necessarily agree with Jon’s conclusion but he covers some important topics in this post.)
- Position Sizing: Why Size Matters to All Investing Greats
- TradersCALM – Introduction to Position Sizing
- Position Sizing – The Most Powerful Investment Concept
- Size Really Does Matter! Position-Sizing Management Can Make a Difference Between Profit and Loss – (Free subscription required)
- T.I.P.S. – Trading is Position Sizing
- My position sizing spreadsheet
- TradeStars’ position sizing calculator
- Dave Laplander’s position sizing calulators
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!
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
Mike,
This is a terrific post. Very interesting.
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
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.
You lost me. How can anybody trade without some kind of position sizing? How would you ever decide how much to buy/sell?