Archive for June 16th, 2013

Comments Off on Static Position Sizing part

Static Position Sizing part


2013
06.16


´╗┐Static Position Sizing part

Dynamic vs. Static Position Sizing part 2

In part 2 of the Dynamic vs. Static web tutorial series, I wanted to elaborate on where I left off in the previous video. The theme was that having the money to pay for something doesn’t mean you can afford it. If I want to go and buy a Rolex watch for example, I have enough money to pay $7,000 $15,000 (I know they can go quite a bit higher than that but cut me some slack here !) to purchase one but can I really afford it? Everyone’s situation is unique and I allow for that when someone begins modelling a trade out using the m3 Money Management Modeler as well. Bask to the Rolex example. Paying for it isn’t a problem on a deeper level, paying for something is one of the EASIEST ACT’s to complete in the world. Simply hand someone cash, a credit card, a cheque etc. That’s not the difficult part, it’s the decision about where else this money could be spent that makes the process tough the mental aspect of it the “buyer’s remorse”. If I paid, let’s go with $10,000 for the Rolex, that’s fine, provided I have another $150,000 in cash sitting in the bank AND my kid’s college fund is fully funded AND my mortgage is completely paid off AND my retirement account is healthy. I think you see where I am going with this. Having the money and truly being able to afford something are very unique. Right now, an expensive purchase like that is not justified in my life but that doesn’t mean certain people aren’t in a position to make such a purchase. Many people purchased what they couldn’t really afford. I suppose it comes down to priorities in one’s life. Back to trading. I defended earlier, that just because a hypothetical $25,000 trading account has enough money to trade 4 SP500 Emini contracts, it does NOT mean you can afford to trade 4 contracts when one factors in their stop loss (assuming they have one in place!) As I clearly illustrated, risking 35% of your trading capital on a single trade is not a wise decision. In fact it’s a quick road to ruin. “But I have enough money and if its a winner, I get paid on 4 contracts”. True you do, but what if you lose on the trade?Are you prepared to lose $1,000 per trade? What happens if you take 3 or 4, perhaps 5 losing trades in a row each totalling $1,000? I can tell you this. Your decision as to the number of contracts you wish to trade is now reduced should you suffer a string of losses such as the example above. In fact if you lose 2 trades in a row, with those settings (5 point stop loss 4 contracts) you will lose $2,000 which would reduce your account to $23,000 from the hypothetical starting balance of $25,000 (before slippage and commissions). You have now been reduced to trading a maximum of 3 contracts because to trade 4 you need a minimum of $24,000 which you no longer have($6,000 margin/contract). Risk Management, Position Sizing and Probability are the absolute bedrock to any and all serious traders. It was a thorough understanding of that fact which led me to create the m3 = Money Management Modeler. A tool that removes all the guess work prior to initiating a trade. “Take care of your losers and the winners will take care of themselves”. The m3 was built with that maxim in mind to take you, the trader, from where you are not to where you want to be.

Enjoy part 2 in the series by clicking the link below to visually see how successful traders model out their trades prior to initiating with real capital..