Different Position Sizing Methods

[Soultrader]

Position sizing is one of the key elements of money management and trading. Here are some models used to determine size.

1. Fixed Size: The number of contracts you trade is fixed at each trade. For example, 2 contracts per trade.

2. Fixed Dollar Amount Of Equity: The number of contracts you trade is determined by the amount of your trading capital. For example, you choose to trade 1 contract per $10,000.

3. Fixed Risk: Your position size depends on the percentage you are willing to risk. For example, if you are willing to risk 2% per trade on a $10,000 account, this is $200. This can be 4 YM contracts using a 10 point stop per trade or 2 YM contracts using a 20 point stop.

4. Generalized Ratio: This changes the rate of increase in the number of contracts or shares with increasing profits.

The latter 3 methods increases size as profit or account size increases. This is known as the antimartingale method. The antimartingale method takes advantage of a winning system or methodology. Any trader with an edge and a winning setup should use a antimartingale method.

A martingale method is a gamblers method. Decreasing the amount of risk after a win and increasing risk after a loss. Gamblers will tend to double up their betting stakes after a loss to break even. Traders should use a antimartingale method in their trading.

[wsam29]

Thats interesting you mentioned the Martingale method.

I have a brief story about it. It involved my friend and online roulette.

His method involved just that, doubling each bet after each loss. He tested it out at home, made some "easy" money, they don't like to earn it. He had some success, he did some number crunching with a spreadsheet and came up with super low percentage of having X amount of losers in a row or the possibility of ruin.

He started pitching the idea to all of us and most of my friends do not trade, nor have any concept of risk management, so there is a differences of opinion, one who faces it every day and them. Now the moment he started running his mouth about how much money he made, it was a loss waiting to happen. Either way, 2 of them went in on the quick money maker so they though.

They started off good, betting 2 bets to net 1 possible win. What he was doing was betting on the thirds on the table. Then the trouble hit, loser, double the bet, lower, double the bet, next thing you know the account was at zero.

The look on his face like "this is not possible, having so many consecutive losers in a row."

The whole idea of risking more to make less is never a winning proposition in the long run.