You can have the perfect entry and you can have the perfect exit but if you don’t know how to size your positions accordingly you won’t win in the long run or won’t be making the most out of your wins.
Correct position sizing can help you on many levels. It can help you stay in a trade much longer while locking in profit. It can reduce your loses in range bound markets. It can turn loses into winners and vice versa too.
Position sizing is all about the contract size or how many shares you should be taking per trade. And the best way to do this is really on your own risk appetite and capital. Our aim in trading is to reduce our loses, preserve capital and maximise our winners.
Here are some methods I use on the type of plays and strategies that I implement.
1. Smaller entry if I’m trying to predict a move on a direction just before my signal gets triggered. If it continues and my signal does get triggered I may add another lot size, all dependent if my target risk to reward is worth it. This help those that enter too early wanting to prove their skills at market timing.
2. I like to trade with odd number size lots. The reason for this is this. If the market breaks away I would have exited more than half my positions, locking in a profit at my first target and letting the rest ride out the wave as far as it can. This helps when the market continues to shoot in that direction for much longer and you won’t beat yourself up for missing the ride.
3. Another way is I’d trade in 3 lot size amounts. This means I can reduce risk at each point of target if I have more than a few profit targets along the way.
4. If I’m having a losing streak, I’ll reduce the size as much as I can. The reason for this is because we all don’t feel like we want to stop trading. And when you’re having a losing streak you might trade not according to your plan for many reasons, and by reducing the size to a minimum you can still be trading, losing and it won’t hurt your account as much. If you can stop trading altogether for a period that would be even better.
5. If the risk to reward is greatly in my favour like 1 to 4. I might trade with a much larger size, assuming that I’m trading according to my plan. This way I can take full advantage of the rewards while reducing my risk and if it does move in my favour I’ll be rewarded greatly.
As you can see, playing with different lot size can maximise your return or reduce your risks greatly. Everyone’s different due to their risk appetite and capital of course. So I recommend playing around with what feels comfortable. A good point of reference is, if you’re not following your trading plan for some reason, trade smaller. If you’re following your plan, play a bit bigger. If you’re losing then reduce your size drastically and if you’re winning, hey maybe even add onto your current size. My favourite for beginners is trade in odd number lots, so you can scale out of each profit target, so you can always make profit while still being in the trade especially on trending markets.