The Most Important Aspect Of Money Management – Position Sizing

Fortunately, by adopting the two percent rule we talked about earlier, we’re using a strategy that decreases the size of our losses during losing streaks. When experiencing a winning streak, our position sizing will actually grow. What’s more, by simply changing the amount of capital we’re wishing to risk, we’re going to change the characteristics to our risk to reward ratio.

Many people believe though, they’re doing an adequate job of position sizing by simply having a stop loss in place. Sure, this will tell us when to get out and by setting our maximum loss, we’ll also know how much capital we’re risking, however, it doesn’t answer the question of how much or how many units we can buy, hence it is poor position sizing. Again, since we’ve already calculated our maximum loss and our stop loss, we can simply take these values, plug them into a formula and calculate how many shares we purchase without ever exceeding our maximum loss.

To read more, go to the Position Sizing website by clicking on this link.

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