Absolute Necessities in Your Financial Survival Kit
How do you survive the whipsaws that can corrode your trading capital while you wait for your trades to begin working for you?
There are two keys:
1. You must use stop-loss points on every trade.
2. You must use dynamic position sizing that adjusts your position size as a set percentage of your equity.
Now, let's talk about “dynamic position sizing”.
What exactly does that mean?
Employ a 'Dynamic' Approach to Money Management
Dynamic position sizing means that, as your account value fluctuates, so should your position or contract size.
To keep your position size uniform in relation to your expanding (or contracting) account value, you want to use a set percentage of account value to determine your position size on an ongoing basis.
Most traders will risk no more than 2%-4% of their total account value per trade. This means that, if a single position hits its stop-loss point, their total loss will be no more than 2%-4% of their total account value.
So, their position size is always determined by how much they are prepared to lose - NEVER how much they are hoping to gain.
Avoid the Gambler's Fallacy
By using a fixed percentage of your current equity, you prevent yourself from falling into the gambler's fallacy of trying to make it all back on one outlandishly sized trade. It keeps your position size commensurate with your account size.
Remember: More than anything else, it's poor position sizing (along with not using a stop-loss) that kills the average investor.
'Sizing Up' the Situation
You should generally use a 4% initial position size as a maximum while using 2% if at all possible.
With this method of money management, you trade the smallest number of contracts when you’re at your worst and trade your largest number of contracts when at your best.
Adjusting your position size is the No. 1 weapon to use for weathering a string of losers.
Every trader -- no matter what system, approach or fundamental research they use -- will go through losing periods where their approach appears to be "out of whack" with the market. Just look at what the value investors went through in the 1990s or the growth guys in the 2000s.
The key to surviving those periods is to keep adjusting your position size smaller (and smaller) until your methodology starts working again. You never know how long a losing streak will last, but you do know that they don't last forever.
Like the rising sun following the long night, markets rotate from bullish to bearish and back again. There is not a thing on this planet that can change this one fundamental fact.
Dynamically adjusting your position sizes gives you a huge edge over the average investor and automatically increases your market survival rate while you wait for that turn to occur. It can go a long way in ensuring that your account lives to trade another day.
May your trading life be a long and happy one.
PS: You can get a FREE “Position Sizing Calculator” on the first page of the web site. Figure out for your self how much you need to start trading, what your stop loss has to be and how many contracts to trade. The Dynamic Swing Trading System, the One Hour Swing & Day Trading System & the Supreme Swing Trading Systems have built in position sizing calculators in their accompanying spreadsheets.
