Chapter 2-Position Sizing For Day Traders

Another important concept of day trading is position sizing. If you are good at position sizing, chances of your success in day trading are higher. There is a saying – “To be successful at investing and trading, you need to become good at position sizing”. And it’s true. Good understanding of position sizing develops as you develop good risk management techniques in day trading. So let’s look at what exactly is position sizing.

What is Position Sizing?

Position sizing is a method of determining how many quantities of any given financial asset available for trading you can buy or sell based on your overall capital risk and risk per trade.

Position Sizing definition
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How To Calculate Position Sizing?

Once you have decided on your overall capital risk and risk per trade, now its time to look at the stop-loss amount. So let’s assume that your next trade will have a stop loss of $1 or Rs 1. As per your overall capital risk and risk per trade, you can determine the position sizing. Look at the below example to understand how to calculate position sizing.

  • Available capital=$10000 or Rs 10000
  • Overall capital risk= 25 %= $2500 or Rs 2500
  • Risk per trade= 1% of your overall capital risk(conservative approach)=$25 or Rs 25 per trade
  • Stop Loss per trade=$1 or Rs 1
  • Position sizing = Permitted quantity as per defined risk per trade
  • Position sizing=Risk per trade/Stop Loss per trade=25/1=25 quantity

So the maximum quantity you can take on this particular trade is 25. This position sizing will work well if you are day trading in stocks. If you are day trading in futures contracts. you need to look at the lot size and adjust the position sizing.

Advanced Position Sizing Tips

Whenever you trade, always keep in mind that you need to pay brokerage fees and transaction fees. So if your entire fees which include brokerage, transaction cost and maybe some other charges based on your country, stockbroker, and stock exchange, add that amount in your stop loss per trade and then calculate the position sizing.

For example, if your entire commissions per trade are $1 or Rs 1, and your stop-loss is $1 or Rs 1 as per the above-mentioned example, your entire risk will be 25 plus 1 which is $26 or Rs 26. So a better way to deal with this is to reduce the quantity by subtracting the actually allowed quantity by additional charges. This means as per the previously described example, instead of taking 25 quantity, take 24 quantity. This will ensure your overall risk per trade will not exceed as per your defined rules. As a day trader, you should always look to make your trades risk free. But how do you convert your risky trade into a risk-free trade? well, that’s what our Chapter 4 Using stop loss is all about. But before jumping to chapter 4, its time to read Chapter 3- Types of orders.

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