The Basic Rules Of Position Sizing


The Basic Rules Of Position Sizing Most successful traders, whether they trade the forex, index, equity, or commodities markets, vouch for the relevance of position sizing in their performance. And why shouldn't they? Without proper position sizing strategies, you could be putting a large portion of your trading capital in danger. Finally, the higher the risk you incur in each trade, the more likely it is that your trading account will be closed. While it is true that the trade might sometimes provide the much-desired large win, most skilled traders will tell you that it is advisable to limit your position size rather than raise your risk needlessly. Before you secure your trades with position sizing rules, ensure that you use the best broker for trading with the lowest brokerage on offer. Zebu empowers your online stock trading journey with a state-of-the-art trading platform as well. Let's take a look at what position sizing is and why it's so important, as well as the best position sizing tactics you'll need to learn in order to enhance your trading. What exactly is position sizing? Setting the correct transaction size to buy or sell a certain instrument, or determining the Rupees amount that a trader will use to start a new trade, is the most basic definition of position sizing. It may appear easy, but it can be rather complex. Before you enter a trade, you should understand how much risk you are incurring and how it will affect your trading account. Furthermore, traders must regularly review their positions to ensure that everything is under control. Keep in mind that markets move swiftly! Furthermore, traders must keep margin requirements and margin stop out levels in mind. What is the significance of position sizing? As you can expect, opening positions with arbitrary position sizes or based on gut instinct will result in disaster. Position sizing is concerned with avoiding excessive losses. If you have a good risk management strategy and stick to it, you are unlikely to lose a large amount of your cash on a single trade. It will also provide you with an opportunity to retain your focus on your account as a whole and all your open positions. It is especially common for short-term traders who must react rapidly to new developments to lose oversight and forget how much risk they already have running before opening fresh positions. This is why it is so important: a successful trader is also a good risk manager. However, position sizing is about more than just avoiding excessive losses. It also provides you with the opportunity to improve your performance. A risk-averse trader who is only ready to risk a small fraction of his capital must realise that he will never generate significant returns. As you can see, position sizing is all about striking the appropriate balance - allowing yourself to maximise profits while avoiding excessive losses. Proper position sizing along with profit-taking tactics can assist traders in developing the optimal strategy for entering and leaving all trades. How do you calculate the size of your position? Let's have a look at a handful of popular position sizing approaches you can use to improve your trading and make better use of position size. Position sizing strategies that work well 1. Fixed rupee value The simplest method to include position sizing into your trading strategy is to use a fixed Rupees amount. This may be especially useful for those who are new to trading or have a little quantity of capital. All you have to do is set aside a certain amount of money for each trade you make. For example, if you have Rs 10,000 in trading capital, you could want to set aside Rs 1,000 for each trade. That is, instead of investing the entire cash into one deal, you can divide it into ten. This instantly reduces the amount of risk you take with each trade. It will also aid in the preservation of your capital if the first few deals you make turn out to be losses. 2. Fixed percentage The most often utilised position sizing approach by traders is a fixed percentage risk each trade. On each trade, you put a small portion of your total cash at risk. Depending on the financial asset you're trading — for example, equity, metals, oil, or indices – most successful traders would agree that a 1 – 2 percent per trade risk is a decent starting point. If you employ the set % risk per trade strategy with a Rs 10,000 trading capital, you should only risk Rs 100 – Rs 200 per trade. The beautiful thing about this method is that it forces you to focus on the percentage risk rather than the monetary value. Then, as your capital rises from Rs 10,000 to Rs 20,000, your 1% risk every trade rises from Rs 100 to Rs 200. Similarly, if your capital falls, you still risk 1%, but it will be a smaller Rupees amount. If you don't, you'll quickly discover that the large risks you incur in each trade will quickly deplete your trading cash. 3. Use of leverage While leverage is one of the primary draws for traders to the equity, index, and commodities markets, we all know that leverage can be a double-edged sword. It has the ability to amplify both successes and defeats. Many trading platforms give leverage ranging from 3:1, 5:1, 10:1, or even 20:1. However, when it comes to leverage, keep in mind that you do not have to employ the utmost level of leverage. Just because it's on sale doesn't mean you have to take advantage of it. It is preferable to utilise less leverage to ensure that you are limiting your risk exposure. If you use too much leverage, you increase your chances of experiencing a capital loss or a margin call if a trade goes against you. 4. Kelly's Criterion Let's have a look at the Kelly Criterion formula: W − [(1-W)/R] = Kelly % It computes the percentage of your account you should put at risk (K per cent). It is equal to your trading strategy's historical win % minus the inverse of the strategy win ratio divided by your profit/loss ratio. The proportion you receive from that equation represents the stance you should take. For example, if you get 0.05, you should risk 5% of your capital per trade. These are 4 of the very basic position sizing rules and points to keep in mind while trading. In a world where trading is one of the riskiest businesses to be in, following the rules of position sizing can drastically improve your risk management. As we mentioned before, we at Zebu offer the lowest brokeragefor trading and, as a result, have emerged at as one of the best brokers for trading. 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