Tackle Today: “P” is for Position Sizing
September 21, 2021
≈ Assume you’re wrong. ≈
Traders,
Rookie traders size positions based on what they will make if they’re right. The logic goes like this. I want to make $500, and my profit per share in this trade is $2. So, I’m buying 250 shares.
Veterans aren’t so foolish. They size positions based on what they will lose if they’re wrong. So if they only want to risk $200 and the risk per share is $2, they’ll purchase 100 shares.
The final letter of our S.T.E.P. system stands for “position sizing.” As in, how much money do I want to risk in each position? While there isn’t one correct answer for all traders, everyone agrees that the smaller the percentage of your portfolio, the better. A common rule of thumb is to risk less than 2% or even 1% of your account in each trade. There are multiple benefits.
First, it keeps your emotions in check.
Second, it allows you to survive losing streaks.
Third, it makes it easier to follow your plan without giving in to fear or greed.
If you were overly emotional during Monday’s meltdown, then it might be because you had too much risk. We strongly suggest reviewing the best practices for position sizing as taught in our S.T.E.P. Swing Trading System.
#TeamTackle
Chart of the Day
Fear Returns
The CBOE Volatility Index (VIX) spiked on Monday to its highest level since May. Panic was in the air on Monday. Keep your wits about you and expect big swings for the time being.
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Trading for Beginners: Swing Trading 101
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Traders Lounge 11 AM EST
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