During my latest webinar, “Earn 10% Per Month in Extra Income: A Safe, Simple Step-by-Step Formula” I was asked numerous times, “how to handle extreme moves in the market.” While there are numerous answers, the simplest and most effective is appropriate position-sizing.
Position-sizing refers to the size (dollar amount) of a position within your portfolio. It is imperative that your account size and risk tolerance be taken into account when determining appropriate position-sizing.
Even if we use conservative investment strategies, we can still lose money. No trade or investment is a lock. No guaranteed winners exist. So position-sizing is always important.
Every investor has a different risk tolerance, performance goals and account size, so everyone’s position size will be different.
How do you know how much to trade with, then?
Key Guidelines for Position-Sizing
There are guidelines that I know will be useful to you if you struggle with the concept of position-sizing.
My favorite guideline is the Kelly Formula.
In probability theory the Kelly criterion/strategy is used to maximize the long-term growth rate of repeated plays of a given trade that has positive expected value.
The formula specifies the percentage of the current bankroll (overall investment funds) to be bet (invested/traded) at each iteration over the like the trading portfolio.
In addition to maximizing the profit, the Kelly strategy also includes the added benefit of having a zero risk of ruin; the formula will never allow for a loss of 100% of the bankroll on any trade. An assumption of the formula is that currency and trades are infinitely divisible, which is actually satisfied for practical purposes if the account size is large enough.
Here is an article that should give you the basics of the position-sizing strategy: How Much Should I Stake – Kelly’s Strategy
Your Risk, Your Profit Potential
I will continue to include position-sizing articles each month, as it is one of the most important aspects of any investment strategy, particularly the trading strategies that we follow. In my opinion, it’s the most critical concept you need to tackle as a trader or investor.
Why is it critical? It is critical because the question of “How much should I allocate” determines your risk and your profit potential.
It’s that simple.
If you want to be a successful trader/investor over the long term, then taking the time to figure out an appropriate position-sizing plan is imperative. Please, please, please do not overlook this important concept.
You will not regret it.
Enjoy a free video replay of my latest webinar, “Earn 10% Per Month in Extra Income: A Safe, Simple Step-by-Step Formula.”