Position sizing is a calculation which determines the optimal amount of units to purchase.
Position sizing is a little known concept amongst the majority of traders and investors and yet it often has dramatic effects on the overall performance. As an example, it has been statistically proven that a random entry with position sizing can (and most often will) generate profits. These results clearly show that trade entry is not the most important fctor to success.
So how can you get started with position sizing?
Although risk is not part of every position sizing calculation when risk is included into the equation, the results most often speak for themselves. The secret is knowing how much you wish to risk on any given trade. An example position sizing calculation that involves risk is shown below;
Jane has $50,000 to invest, she has decided to risk only 1.5% of this amount on every trade. Jane looks to buy shares in company “ABC” at the current price of $3.45. Jane has also set a stop loss at $3.10. How many shares does Jane buy?
First let’s calculate the amount of risk in dollar terms (1.5% x $50,000 = $750). $750 equates to the amount of dollars Jane would lose if the share price drops from $3.45 to $3.10. Extending on this further using some maths we can calculate the number of shares to purchase is 2,143.
$3.45 – $3.10 = 35c
$750 / 35c = 2,143
Using this result, Jane has to buy 2,143 shares of “ABC” at $3.45 to satisfy the position sizing equation.
There are many different position sizing calculations you can use, the one shown above is a very simple one that includes risk in the calculation. Stator includes multiple position sizing models which you can use to size positions from within the software. Using these position sizing calculations makes it easy to employ successful position sizing techniques directly into your trading.