Trading with a plan
I've posted several examples of my trading plans recently. And how I try to teach it's all in the numbers!
Thought I should cover how to keep the numbers equal, during planning. This is called position sizing.
Definition of 'Position Sizing'
The dollar value being invested into a particular security by an investor. An investor's account size and risk tolerance should be taken into account when determining appropriate position sizing.
Investopedia explains 'Position Sizing'
Position sizing basically refers to the size of a position within a particular portfolio, or the dollar amount that an investor is going to trade.
Now the hard part.
Say you are trading $8000 on swing trades, in 4 stocks. Normally you would devide 8k/4 or 2k each. But what if you want equal cash gains and losses, but find patterns which give different size gains?
Some adjustments will be needed to keep risk divided equally over 4 trades. Say 2 trades show 10% gains possible, but 2 show 20%. If you play $2k in each the risk reward levels are not equal.
Just do the math. The 2 larger gain plays will need less cash and 2 smaller gain plays need more cash, to balance out (position size) at 15%.
If the plays found are 5%, 8%, 15%, 30%. Find the average and work the numbers for that average.
Trading on a plan, allows one to know possible gains or losses, of every trade played. So needed cash goals can be reached, within your business plan.
