Maximize your trading effectiveness by knowing when and how to vary position sizes--without skipping sound risk management.
For the average retail trader, learning to scale up your position size can be a nerve-wracking process that can lead to unexpected and outsized losses. Fortunately, there are some guidelines that may help smooth your progress if you are considering scaling your position size.
One mistake traders make when attempting to increase their positon size is rushing the process. Unprofitable traders often think they’re ineffective because they aren’t trading large enough size. Conversely, some profitable traders think they’re leaving money on the table by trading too small.
Either perspective can be dangerous. And that kind of mindset ignores a primary consideration for determining position size: risk management.
Perhaps the best time to create a quantifiable, risk-focused trading methodology may be when you're trading small. It’s also the time to test out different trading styles and techniques and incorporate them into a strategy that is designed to protect your downside and help maximize your upside.
Only once you are comfortable with your strategy—and feel your objectives are defined—you might consider increasing your position size.
You might start by deciding what your maximum risk per trade will be. This is a highly personal decision, but many traders set their max between 1% and 5% of their total account equity.
So if you have a $100,000 account and you’ve determined that you’ll risk 2.5% per trade, your per-trade max risk would be $2,500. Suppose your account balance eventually doubled to $200,000. At that point, keeping a constant per-trade risk of 2.5% would equate to $5,000 (double what it was before).
The potential advantage is that by keeping your risk percentage constant, your position size can rise and fall with your account balance. It’s one way to size up your positions that is also objective and non-emotional.
The same logic holds on the downside as well. For example, suppose your trading account dropped to $50,000. Keeping to a constant 2.5% maximum risk per trade would lower your risk target as well, to $1,250. This automatically heeds the advice of many seasoned traders: when losing, trade smaller.
Remember: there’s no need to rush into trading larger positions. The market will be there when you’re ready. First, your goal should be to refine your trading as much as possible so you can be effective over the long term. If you focus on that, and manage your risk, you’ll have plenty of time to increase your position size in a way that makes sense.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.