| Position Sizing is the process of determining how | | | | historically lost money 60% of the time whenever a |
| many shares of stock that you should trade in order | | | | certain condition existed, you should classify the |
| to risk a certain dollar amount or percentage of your | | | | condition as a risk factor for the trade. Some |
| account. You must consider the size of your exit | | | | examples of questions you should ask to determine |
| stop and the amount of money you are willing to risk | | | | risk-factors for day trades are: |
| when making this calculation. For example, if you are | | | | 1. Does the trade have enough time to reach its |
| day trading a $50 stock, and you place your exit | | | | profit objective before the market closes? |
| stop 50 cents from your entry price and you do not | | | | 2. Are you trading in the same direction as the |
| want to risk more than $100 on a particular trade, | | | | stock's intermediate or short-term trend? |
| you would have to purchase exactly 196 shares in | | | | 3. Are the market indices (S&P, Dow, Nasdaq) going |
| order to avoid losing more than $100 if your exit | | | | in the same direction as the trade? |
| stop is triggered. | | | | Answering "No" to any of the above questions may |
| After you have performed enough position size | | | | create a risk-factor depending on your analysis of |
| calculations, you will quickly see that the ability to | | | | past trades. However, the above considerations are |
| vary your position size with stocks gives you a | | | | only a small sample of potential risk factors that could |
| tremendous tactical advantage because no matter | | | | affect a trade when day trading. You should perform |
| how large your stop, you will almost always be able | | | | a thorough review of past trades to identify |
| to adjust the number of shares to an amount that | | | | additional risk factors with respect to your trade |
| will fit your desired level of risk. In other words, you | | | | setups. |
| can maintain the same amount of money at risk, | | | | Once you have developed your list of risk factors, |
| regardless of whether your stop is 50 cents or 5 | | | | odds-based position sizing entails decreasing your |
| dollars from your entry price, by simply adjusting the | | | | position size a predetermined percentage whenever a |
| number of stock shares. This flexibility allows you to | | | | risk factor exists. For example, you may decide to |
| take day trades using various strategies and chart | | | | reduce your position size by 10% for each risk factor |
| time-frames without enabling the size of your stop to | | | | that exists in order to carry a smaller position when |
| dictate whether or not you can take the trade. | | | | the odds are not entirely in your favor. Therefore, if |
| What is odds-based position sizing and why is it | | | | three risk factors exist, you would reduce your |
| important? Odds-based position sizing means varying | | | | intended position by 30%. The result of this process |
| the amount of risk (i.e., money you are willing to lose) | | | | will be that you only carry your largest position size |
| for a particular trade if certain risk factors develop. | | | | on your highest probability trades and your smallest |
| This type of position sizing is important for day | | | | position size on your lowest probability trades. |
| traders because every trade should not be treated | | | | A good way to begin this procedure is to develop |
| equally. Certain trades have a higher probability of | | | | your list of risk factors. Before you enter a trade, |
| success than others based on the risk factors that | | | | count the number of risk-factors that exist against |
| you have defined for your trade setups. | | | | your trade, and then reduce your position size |
| Risk factors are conditions that you have identified | | | | accordingly. Over time, you will be able to quickly and |
| by reviewing past trades that tend to degrade the | | | | intuitively perform this process in your head. |
| quality of the trade. For instance, if a trade setup has | | | | |