TradersCALM - Introduction to Position Sizing © "Dedicated to trading with good feelings."                         All services are free.
	Many brokers will enforce their own, exchange and possibly regulatory rules on the maximum position size an account can sustain.     Invariably, these rules permit trading at a level far in excess of any position size that provides for ongoing trading success.     This article does not cover this aspect of account management. The purpose of this article is to discuss more practical issues relating to lower and more realistic position sizing considerations that while commonly understood by a small number of traders, are relatively rarely discussed in traders literature. The topics discussed here include:     • what is position sizing?     • why is an appropriate position size so important?     • how do I derive an appropriate position size?     • cross-system position sizing,     • what simple things can I do next? What is position sizing? Position sizing is simply the how much of trading.     It answers the questions like "How many contracts/stock/foreign exchange should I trade for my account size?". Most traders over-trade their account and this is one of the biggest single causes of the 90% plus trader failure rate.     Despite appropriate position sizing being fundamental to trading, many traders just trade one standard or 'mini' contract or what they 'feel' is right. As a traders coach, I am frequently reminded that many traders with account sizes ranging from the equivalent in dollars of 4 to 8 figures often trade the same position size! Somehow the same minimum trading unit, as defined by the exchange, or suggested by their broker, is frequently the default position size for such a large range of situations. Apart from traders domiciled in the USA, (limited by SEC rules), it is possible and practical to trade with internet dealers for pennies a point rather than say $50 a point or one share rather than hundreds or thousands - and so position size can be varied over a wide range to suit all requirements.     Even USA residents, with persistence, can benefit from such opportunities - and since only pennies a point are to be traded, the capital that needs to be risked is small compared to trading at $50 a point. Why is an appropriate position size so important? Because using an appropriate position size is often the difference between long-term success and short-term failure. When you are using a position size consistent with your preferred level of risk - your fear level drops, your error rate falls away, you start noticing fresh aspects of the market behaviour and your trader behaviour that previously your fear had hidden from you.     This leads to improvements in your trading system, a higher reward to risk ratio and more profits.     To get to this virtuous circle of more confidence, less fear, more improvements, calmer, more improvements, calmer, more improvements, calmer, you need to derive an appropriate position size. How do I derive an appropriate position size? Everyone is different.     Traders have differing account sizes.     Each trader has a unique tolerance of risk.     Each trader defines personal financial ruin differently including such definitions as:     • only half my original account value remains,     • I suffer a 15% draw-down from peak account value,     • I get a margin call,     • my broker tells me my account needs more money. So how does a trader derive a position size appropriate to his/her status and preferences?     The answer is the same for all - using a risk of ruin calculation to determine a position size congruent with account value, trading system characteristics, risk definition and tolerance for risk. Practical details can be found at Risk of Ruin Concept Cross-system position sizing? Some of the more profitable traders also make very regular profits - it looks like dollar bills coming off the end of a production line.     A tool they invariably use for generating such regular profits includes cross-system position sizing. More information can be discovered in Position Sizing Interview What simple things can I do next? The things to consider doing over the next few weeks and months are:     • reducing your position size until you know what it should be,     • understand the risk of ruin concept,     • determine what you mean by ruin,     • decide your acceptable risk of ruin,     • determine your risk of ruin at your current position size,     • set your position size such that your risk of ruin is acceptable,     • trade profitably with good feelings. TradersCALM home page