One of the mistakes people commit in trading is to completely disregard the amount of risk to trading account. This is especially the case with fixed lot size in futures and options or otherwise when they take fixed number of shares per trade i.e 100, 200 shares.
Lets take an example, if we buy 100 units of 5$ stock our total value of trade will be 100*5 = 500$. If we buy 100 units of 500$ stock our total value of trade will be 100*500 = 50000$. Profits and losses arising with fixed lots (100 units, in this example) will result in huge swings in the trading account.
Risk Management
Trading is all about preserving capital first and then capital appreciation. Risk management is key to survival in stock trading. One of the golden rules of trading is "cut your losses short but let your profits run". When we say "cut your losses short", it means that we should always be aware of the maximum amount of dollar value that we are willing to risk. This can be for example 1% of total trading capital.
Trading Plan
Coming to the second part. When we take the trades based on technical analysis, we plan them based on support and resistance that we observer on the charts. Basic rule of trading is that we should have an entry, exit and stop-loss (trading plan) before we execute our trade. The difference between our entry and stop is not fixed, it changes with every trade depending on the chart structure.
Position Size
Therefore, we don't have any control over the above two parameters. Both are to some degree "fixed", based on certain rules, to keep overall losses in check. The only thing that is variable is position size. Depending on our entry and stop this will and should change with each trade. With every trade we will have a different number of shares to buy or sell so that our maximum risk per trade remains constant unlike the case with fixed lots.
You can download the position sizing calculator file, free from here.
Screenshot of the position sizing calculator below.
How to use the position sizing calculator for online forex, stocks and commodity trading ?
As always, you can modify the "grey cells" rest will get calculated by the excel file. You need to input, your trading account size (will change with every trade), percentage of risk you want to take per trade (will remain fixed depending on your risk profile) and your trade plan (entry, stop-loss and exit level).
You will get the number of shares that you should ideally trade along with reward to risk ratio (how many times the reward is compared to risk) and other details of the trade.
What you should do is experiment with different entries and exits to see how your trade size changes. Tighter stops will allow you to trade more shares hence your "total trade value" will increase. Increasing the risk percentage from default 1% to 2% will also increase the total trade value.
I hope you will find the position sizing calculator useful in your trading, trade and money management.
Good luck with your trading :-)
Lets take an example, if we buy 100 units of 5$ stock our total value of trade will be 100*5 = 500$. If we buy 100 units of 500$ stock our total value of trade will be 100*500 = 50000$. Profits and losses arising with fixed lots (100 units, in this example) will result in huge swings in the trading account.
Risk Management
Trading is all about preserving capital first and then capital appreciation. Risk management is key to survival in stock trading. One of the golden rules of trading is "cut your losses short but let your profits run". When we say "cut your losses short", it means that we should always be aware of the maximum amount of dollar value that we are willing to risk. This can be for example 1% of total trading capital.
Trading Plan
Coming to the second part. When we take the trades based on technical analysis, we plan them based on support and resistance that we observer on the charts. Basic rule of trading is that we should have an entry, exit and stop-loss (trading plan) before we execute our trade. The difference between our entry and stop is not fixed, it changes with every trade depending on the chart structure.
Position Size
Therefore, we don't have any control over the above two parameters. Both are to some degree "fixed", based on certain rules, to keep overall losses in check. The only thing that is variable is position size. Depending on our entry and stop this will and should change with each trade. With every trade we will have a different number of shares to buy or sell so that our maximum risk per trade remains constant unlike the case with fixed lots.
You can download the position sizing calculator file, free from here.
Screenshot of the position sizing calculator below.
How to use the position sizing calculator for online forex, stocks and commodity trading ?
As always, you can modify the "grey cells" rest will get calculated by the excel file. You need to input, your trading account size (will change with every trade), percentage of risk you want to take per trade (will remain fixed depending on your risk profile) and your trade plan (entry, stop-loss and exit level).
You will get the number of shares that you should ideally trade along with reward to risk ratio (how many times the reward is compared to risk) and other details of the trade.
What you should do is experiment with different entries and exits to see how your trade size changes. Tighter stops will allow you to trade more shares hence your "total trade value" will increase. Increasing the risk percentage from default 1% to 2% will also increase the total trade value.
I hope you will find the position sizing calculator useful in your trading, trade and money management.
Good luck with your trading :-)
Useful information shared. I am very happy to read this article. Thanks for giving us nice info. Fantastic walk through. I appreciate this post.
ReplyDeleteThank you very much. Excellent spreadsheet
ReplyDeleteWhat is a usual or acceptable Reward:Risk ratio? Thank you.
ReplyDeleteHey George,
DeleteThere is no such thing as "acceptable Reward:Risk ratio". Why? because it depends on which kind of trading system we are using.
A typical trend following system (I use such kind of system), will have 1:1 win loss (i.e 50 % probability of win or sometimes less) and reward:risk ratio of 2:1 or more
While a day trading system will usually have high win:loss ratio 4:1 (i.e 80 % probability of win)and 1:1 reward:risk (sometimes adverse i.e 1:4 just to increase the the win:loss ratio!)
We should not look at reward:risk in isolation but combine it with win loss ratio or probability of trading system. The trading system should have "statistical edge" regardless of win loss ratio or reward:risk ratio.
Cheers :)
Thanks sir. I try this one. I'm have an test account worth $10k (not real money) in FxPro and my equity now is $360k in just two weeks. I will start to trade next week and I having problems calculating position size. I'm trader in stocks and stocks is pretty straight forward in terms on lot size.
ReplyDelete>> Jerico
can you use this same excel sheet to calculate position size when trading forex, shares, indices and commodities?
ReplyDelete