This week our attention turns to money management. Over the following five messages, we will share thoughts on position sizing, stop losses, asset allocation, capital efficiency, and portfolio protection.
Position sizing refers to how much money you allocate and risk in each trade. In other words, the size of each position. Thus, position sizing. There are two rules traders commonly create.
First, don’t allocate more than X% of my portfolio in a single position.
Second, don’t risk more than Y% of my portfolio in a single position.
The first rule is about diversification and protects you if a gap or unpredictable decline strikes. Some traders use 10%. Though it depends on the strategies and tickers you’re using. For instance, if you’re buying shares of a broad-based ETF like the S&P 500 (SPY), you can probably allocate a larger percentage of your portfolio than if it were an individual volatile company like AMD.
The second rule is arguably the more important of the two. The amount will vary depending on the types of trades and time frames. A common rule of thumb is to not risk more than 1% to 2% of your entire account in a single trade. Thus, if you had a $25k account, you wouldn’t risk more than $250 to $500 in a trade.
The objective of position sizing rules is to limit the depth of your drawdowns so you can survive them financially and emotionally. Seeing your account decline 8% to 10% once in a blue moon is acceptable. But watching it crater 30% frequently is unnecessary and likely means your position sizing rules need to be adjusted.
🛑 Webinar Tonight! › Tackle Trading 101: What are the Financial Markets with Coach Matt Justice at 8:30 PM EST on YouTube
In this webinar, Coach Matt will introduce to new traders and investors the concept of the Top Down approach to the market. Why do we analyze the indexes? How to determine your market bias? What are sectors and how to spot sector rotations? We cover it all!
Here’s what you are going to learn:
✅ What are the Market Indexes
✅ Learn how to determine your market bias
✅ Learn about Sector analysis
✅ Introduce the concept of Delta Weighting
Video of the Day: Stock and Options Position Sizing Calculator – Gino’s Gems #tradinghacks
Coach Gino explains how he uses the Position Sizing Tool when using the Tackle Trading Trade Journal in this Gino’s Gem.
Chart of the Day: S&P 500 Seasonality
August has begun and seasonal patterns suggest bulls temper their enthusiasm. Will this year be different?
Today’s line up
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day, and fun in a way that only Matt and Tim can deliver.
Watch the Stock, Options, Commodity, and Forex Reports to help you prepare for the week.
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