Get to grips with long positions, short positions, and how to establish a position size that is commensurate with potential opportunities and your own tolerance for losses.
Strategy, Planning and Risk Management
When you build a trading strategy, a lot of time and consideration has to be given to essentials:
- Which asset class to trade,
- Whether to buy or sell that market
- At what price to enter the trade
- What a sensible target level is
- Where to place a stop
Cutting across all of these is the essential issue of risk management.
Position sizing is an important technique to control it.
Position sizing means deciding the amount or size of the position you’ll take in any trade or investment. Correct position sizing helps you manage risk before you even enter a trade by ensuring that the amount you could potentially lose is within your risk tolerance levels.
See how experimenting with a Hantec Markets Demo Account can help you understand your risk tolerance before starting to trade
As a guideline, most professional traders look to risk no more than 1% of their trading account on any one trade. You may wish to set up further rules for your risk tolerance, for example, not risking more than 2% of your assets under management (AUM) or a trading account on any one day. But the 1% guideline is a good place to begin.
If you exceed this amount, stop trading and evaluate. You might even go further and have weekly and monthly risk tolerance percentages relative to your AUM/ trading account size, to ensure that your capital doesn’t suffer aggressive drawdowns.