Risk Management It is an important aspect for any investor or trader. It’s a strategy help people Make sure they are glorify they positions while Reduce the amount of risk Taking.
One of the most important approaches to risk management is known as position size. Why is this so important?
Many traders are afraid of losing money, so they get it biased by their feelings. This approach allows traders to mitigate bias and other psychological traps.
In this article, we’ll look at what evaluating your trade size means and how you can put this strategy to good use.
What is the position size?
“Limit your size in any situation so that fear does not become the dominant instinct guiding your judgment.”
Joe Vidic
The quote must be above your steering light When considering resizing a site. The offer was made by Joe Vidich, a hedge fund manager with an average annual return of more than 20%.
Position size refers to the situation in which you are opening trades of the correct size. The idea behind this is relatively simple. One of the best ways to make a lot of money is to make sure you open large trading volumes.
For example, if you have a $100,000 account, you can buy $10,000 worth of company stock, or the whole $100,000. In this case, if your trade goes well, the initial trade will be more profitable than the first one.
but, If trade continues in the southsecond trade It will lead to a greater loss. In some cases, this will lead to a complete shutdown from your trading account.
Therefore, in determining position sizing, the trader’s goal is to make sure of it balance between risks who incurred huge losses And that of profit maximization In the market.
What happens if I get my trade size wrong?
There are several reasons why this quote on position size is so important. Improper position sizing can lead to various errors that negatively affect your performance. We don’t think you want to undermine your efforts.
Emotions can overcome logic
First, is Helps ensure that you are not overwhelmed in a panic selling situation. Panic selling is the situation you are in Rush out of your position In a hurry when there is a sudden change in market sentiment.
when your posts in a good positionThere is a possibility that you You won’t worry Lots of losing money.
Partial earnings
Second, a quote will help Prevent premature closing of deals. It is a common situation where people close their positions very early.
For example, you open a long position at $12 and hope to get out of it when it moves to $15. However, because of your fear, you close the trade at $12.5 when You haven’t realized all of your winnings.
Related “ How to keep your trading profits for longer
Exposure to high volatility
Third, position resizing will help Avoid excessive fluctuations. When you’re in a good position, you usually won’t be afraid of getting caught in a lot of swings.
Volatility is a profit driver for a trader, and it can bring huge returns…but only if our trades go as well as we hoped! Improper management of your positions can also be detrimental Effects on portfolio diversification.
What makes resizing positions so powerful
The most common question among traders is: the The best strategy To place your trades well. The answer to this question Depends on on a number of factors.
Your account size
First, it depends on your account size. in most cases, If you have a small accountThis means that He should Make sure you are Executing small deals To help create your account.
For example, suppose you have a $5,000 account and you don’t use leverage. In this case, if the trade goes negative and you lose 50%, it means that your account will have $2,500 left. With such a small account, you have it Chances of recovery the money Difficult.
Related “ How to become a successful trader start small
On the other hand, if you have a $50,000 account and it drops 50%, you’ll still have $25,000 to trade with.
This explains why Bill Ackman was able to make his money back after losing more than $4 billion when Valeant Pharmaceuticals’ business went south.
So, if you have a small account, it is recommended that you do so Open small deals as they grow. In this case, You won’t make much money. However, it is also I mean, you will Not be able to lose so much of money as well.
Your risk/reward ratio
The other thing that often affects your position size is: risk/reward ratio. This is a ratio that looks at how much The risk you take in relation to the reward you expect.
As a trader, you should Newspapers all your deals. Doing so will make it easier for you to calculate your profit and loss ratio.
This ratio will make it It makes it easier for you to understand the performance of your strategy. Also, it will help you decide how to place your trades well.
For example, if you usually lose more money than you make, you should consider increasing your trading volumes.
Your confidence level
The other thing you need to consider when adjusting your trading volume is Your confidence level. This means that you should He increases Your trading volume When you are very confident in a trade.
For example, if you think the trade will be profitable, you should consider opening a larger volume. A good example of this is when an asset is moving in a range The upside.
On the other hand, you should Limit sizes of your trade When you are waiting for a hack. In this case, there is always uncertainty as to whether or not the asset will be hacked. Therefore, you should always ensure that your trade sizes are up to date.
your influence
Finally, you should consider the size of your leverage when determining your position size. If you use a lot Leverage, you shall guarantee that Your trade volumes are relatively small.
When you combine a lot of leverage with a higher position size, there are chances that you will lose more money if your trades are not profitable.
summary
In this article, we have looked at the concept of position sizing and why it is important. We’ve also looked at a few things that will help you place your trades well.
In most cases, these tips will greatly assist you in managing portfolios and trading in general.