Position
sizing (syn. money management) 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 in. 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.
Position Sizing Strategies
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