Sunday, 18 October 2009

Two principles to trading

If there are two principles to trading that most traders ignore, it is risk management and proper position sizing. Over a course of many trades, even with a robust strategy, performance will suffer if proper position sizing is not implemented.
Now, with the assistance of Aspen Trading Group’s FX Risk / Position Size Calculator you can immediately determine the correct amount of forex lots to trade each time while also knowing your total risk exposure as a percentage of your portfolio.
Simply plug in your starting capital, amount you wish to risk per trade as a percentage of your capital and your stop loss price. Instantly the results will be displayed.
"Why do I need to adjust my position size, I normally trade the same amount each time?"
Your performance will vary significantly, for better or worse, if you do not risk a consistent amount on each trade. If a trade has a large stop loss and you trade the same size as you would if the stop loss was far less, the amount of risk you incur increases greatly. Let's look at an example.
A sampling of 100 trades from our FX Alert Service provides a great example. Trader A took all 100 trades and adjusted the size of each trade to risk roughly 1.5% of their account versus Trader B who traded 5 FX-mini lots throughout. Based on a starting equity of $20,000, look at the difference:
Total Returns:
Trader A 38.2%
Trader B 14.8%
Same trades; dramatically different results.

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