Risk Management & Position Sizing Formula
ACTUAL NUMBERS ARE EXAMPLE ONLY
1. Never lose more than 2% of account in any one trade.
2. Never have more than 10% of account in any one trade.
3. Never have more than 70% of account in all trades.
4. If account is down 15%, stop analyze and refund
ACTUAL NUMBERS ARE EXAMPLE ONLY – You have to decide what percent you are comfortable with as risk and make it uniform to the current account balance when planning / placing the trade.
For legal reasons I put it like this-
Consider not losing more than around 2% of total account in any one trade.
Consider not having more than around 10% of total account in any one trade.
Consider not having more than 50% of total account in all trades.
Example: Position sizing
If the stock drops to my exit area or stop out point,
1 contract of my option will lose about lets say $125……
2% of my total account would = $500 (25k x 2%)
Therefore I can possibly do a max of 4 contracts. (4 x 125 = 500)
Total to buy 4 contracts = $600each contract x 4 = $2400
10% of my account = 2500 (25k x 10%)
Trade is $ 100 less than the max I want to put in each trade.
Now consider do I have at least half or 70% of account buying power left.
Again for legal reasons this is an example only, but very similar to what I use for accounts between 10k to 100k
If account Net Liquidity was to drop what %, do you stop trading?
When to start taking profit?
If I see a trading post x$, I take at least a portion of the trade off to realize profit. Ex: $100 or more showing in profit and I have 5 contracts open, then I might take 2-3 contracts off. And adjust stops on rest.
Up 100% – Take half off the table = risk free trade.
Try to protect break-even point as soon as possible.
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