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#1 Posted : Monday, July 18, 2011 5:45:36 AM(UTC)

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Position sizing (syn. money management or trade sizing) is one of the most important and least understood concepts with losing traders. It is not risk control, not diversification, not avoiding risks, not stop-loss. Position sizing tells you how many shares (contracts) to buy and how much of your account to place on next trade. Whenever you enter a trade, you have made two decisions: not only have you decided whether to enter long or short, you have also decided upon the quantity to trade. Most traders gloss over this decision about quantity. They feel that it is somewhat arbitrary in that it doesn't much matter what quantity they have on. What matters is that they be right about the direction of the trade. The decision regarding quantity for a given trade is as important as the decision to enter long or short. While your trading system tell you what, when and how to trade, position sizing strategy tells you how much to trade. More than 90% of people trading shares lose money because they do not use correct Money & Risk Management principles or have the discipline to follow them. Money Management, Position or Trade Sizing, no matter what you call it, You Better Know It! "Money Management is like sex: Everyone does it, one way or the other, but not many like to talk about it and some do it better than others. But there’s a big difference: [censored]sites on the Web proliferate, while sites devoted to the science of Money & Risk Management are somewhat difficult to find." - Gibbons Burke NEVER risk more than 2% of your Trading Capital on any one trade. e.g. If you have $30,000 Trading Capital your maximum risk (loss) should be $600 but what many forget is to also cater for brokerage. If it’s say $50 RT your maximum risk is now $550 and a stop is set appropriately so if your share drops in value by $550 you EXIT first opportunity. Never Trade with more than 20% of Trading Capital on any one trade. e.g. Again, if you have $30K your trade size would be $6000 but I prefer to use 19% so if I have 5 open trades and will still have 5% of my trading capital out of the market to allow for things like slippage, education, data, etc. Here’s a simple mistake many make regarding their Trading Capital? e.g. my 1st trade is now worth $7000, up $1000 so I decide to open my 2nd trade. Do I base my next trade TC value $26,000 or $20,000 or $25,000 again? The correct method is to first determine the share value if your current stop was hit. You may be up $1000 but your trailing stop is set and if hit you make less, say $900 so the next calculation would be based on $30,000 + $900. Your true Trading Capital is your available Cash plus the value of all your open positions, if all the stops were hit. ”The only things in life that are certain are Death and Taxes!” Benjamin Franklin So it should be noted that past performance is not a reliable indicator of future performance but you can control the risk you’re exposed to. It's the 21st Century and it’s quite normal to manage one’s own investments, yet very few implement disciplined, professional money risk management principles or understand them. During the stock market boom, limiting risk was always an afterthought, but given the recent volatility & market conditions, let’s get serious! Professional Money and Risk Management strategies, used correctly and together, will be your foundation to trading success. Essentially, Money Management tells you how many shares to trade at any given time and Stop placement is where you must accept you have made the wrong decision, close that trade and move on. It is a defensive concept that keeps you in the game to play another day. Don’t confuse Money Management with Stop placement. Stop placement does not answer the question, how much? Risk Management is the difference between success and failure when trading shares. It refers to Stop placement and will minimize any losses and you WILL have them but will also maximise any profits and this stop is called a Trailing, Maintenance or Profit Stop. Money Management optimizes capital usage. Few have the ability to view their portfolios as a whole. Even fewer traders and investors make the move from a defensive or reactive view of risk, in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital. Let me introduce tou to JBL Risk Manager V8. It will help you do all of the above and very easily. Now available at Equis as a MetaStock plug-in saving you $100 until 20th July 2011. Trial is also available, act fast!
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