POSITION SIZING CONCEPTS
When we talk about position sizing we’re talking about how many contracts you should trade relative to the amount of capital in your trading account. Generally speaking, the more money you have in your account, the more contracts you can reasonably trade. However, let’s look at this issue in more depth…
Consideration #1: How much experience do you have?
If you're relatively inexperienced, please take this advice: Go SLOWER and SMALLER than you probably think. In other words, take you time. Don't try to grow too quickly.
Consider trading in simulation for a bit longer than you might think necessary. Basically, if you're not making successful decisions in simulation mode, it's going to be worse in live trading. So, take your time. Have patience
Additionally, no matter how much money you have, you should start small. Start with no more than 1 or 2 contracts. If you are not making money with 2 contracts, you're certainly not going to make money with 20 contracts.
Consideration #2: What is your trading style?
This is an over-generalization, of course, but generally there are two types of successful trading styles. Typically you either have a high-percentage of winning trades with smaller winners or you have a lower-percentage of winning trades, but the winners you have are quite large.
If your style is higher-percentage, you can afford to risk more per trade. If your style is to lose more than you win, but to make up for it with a few really big winners, then you have to keep your risk per trade much lower.
By the way, both styles work. There is no one-size-fits-all way. It's just important to understand YOUR method and the ramifications in regard to position sizing.
Consideration #3: Do you have the "stomach" for a lot of variance?
This feeds off of #2 above, but it's important that you understand yourself and your personality and your tolerance for risk and variance. If you're ok with big swings in your equity, you can risk more per trade. Not many people can handle it, though. Most people should err on the side of trading smaller rather than trading larger.
- Guidelines For Determining Your "Standard" Position Size
- "Reverse Engineer" Your Position Size
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