How To Position Size Like The Pros

| April 30, 2010 | 0 Comments

I’m sure you’ve heard by now.

We’re getting ready to launch our new leveraged ETF trading service called Quick Strike Trader.

I’m really excited for you to see this system in action.  I’ve poured endless hours into researching and testing.  I’ve refined the system into the trading service you’ll be able to get your hands on in a few days.

Today, I’d like to tell you about one piece of the Quick Strike Trader trading plan… Position Sizing.

And the best part is, position sizing can be used with other types of investments and trading strategies.  It’s not exclusive to trading leveraged ETFs.  (You can use it in your own trading as well.)

You may be wondering why I’m pounding the table on position sizing.

It’s simple.  Position sizing is what separates professional traders (who make a lot of money) from those who lose money trading the markets.

Good position sizing will increase returns and limit risk… And who doesn’t want that?

Limiting risk is important because there’s nothing that will knock you out of the game faster than losing money.  Hey, it’s awfully hard to trade if you don’t have any money!  (It’s a lesson I learned the hard way years ago when I was just starting out.)

Even if you have the best analysis, the best system, or the best technology, there’s one thing every trader must accept.  Every trade isn’t going to be a winner.

In order to stay in the game, you need to be able to handle the losing trades.

Position sizing is how professionals ensure they’re able to stay in the game.

The position sizing rule we use in Quick Strike Trader is percent risk. Percent risk is how much of your total capital you’re willing to lose on a single trade.

Most experts agree you should only put 0.5% to 4% of your capital at risk on a single trade.  And with really volatile investments like leveraged ETFs, you might want to keep it under 2%.

So if you have $10,000 to invest and put 2% at risk, you’re only risking $200 ($10,000 x .02) on any given trade.

But that doesn’t mean you’re only going to buy $200 worth of the stock or ETF.  Because you’re never going to hold it until it reaches $0.  (And if you’re only investing $200 in each trade, your broker’s commission will eat up the majority of your profits.)

So you need one more piece of information… a trailing stop.

A trailing stop is a pending order to sell an open position once certain criteria are met.

The type of trailing stop I use most of the time is percentage change.  For instance, a 10% trailing stop tells your broker to sell the stock or ETF if its price drops 10% from the highest point it’s reached.

I could go on and on about trailing stops (and I do in the Quick Strike Trader Operating Manual) but I don’t have enough room to go into all the details here.

Just remember, a trailing stop limits the amount you’re willing to lose before you sell.

Once you determine the trailing stop percentage, you know how much money is at risk on each share you buy.

Let’s say you buy an ETF for $50 a share and set a trailing stop at 10%.  If the ETF drops by $5 ($50 x .10) to $45, your trailing stop will trigger. And your broker will automatically sell the ETF.  In general, the most you can lose is $5 per share.

Now all it takes is some simple math to get your position size right.

Let’s put our earlier examples together…

You’re risking 2% of your $10,000 in total capital.  That’s $200 at risk on each trade.  And you have a 10% trailing stop.  So the most you can lose is $5 per share.

Divide $200 (risk per trade) by $5 (risk per share) to get 40 shares.

By buying 40 shares at $50 apiece, your cost is $2,000.  But the most you can lose with a trailing stop in place is $200.

In a nutshell, that’s how position sizing using percent risk works.

This is a powerful position sizing system with a track record of increasing returns and limiting losses.  It’s one way professional traders cut the losers short and let their winners run.  And that’s the name of the game when it comes to successful trading.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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