I’m going to share the most important considerations when deciding on the best position size for your trade. We will include the stop loss, the size of the account, your aggression as a trader and the market you’re trading.
As a trader, your most important objective is to protect your trading account. This means you should always choose the best position size. So I am going to explain to you the way we professional traders do it, not someone who uses a demo account, but multiple real-money live trading accounts.
What does position size mean?
It means how large your trade is; how many lots or contracts you have purchased to open your trade. The more lots you buy the larger your position is. The more contracts you buy, the larger your position is. Normally the difference between lots and contracts is the difference between CFD and Futures trading.
Are You Aggressive Or Conservative?
Are you an aggressive trader or a conservative trader?
Most people will respond with something like: “well i’m aggressive! I’m one of best traders I know!”, and that’s fine, in which case, I don’t think like you. But I probably have the same goal – to make money from the market. I would say that I am definitely a conservative trader. And I believe that capital preservation is much better than loss of capital.
Once you know which type of trader you are, you can look at the size of your account.
How Much Are You Trading With?
Traders often make the mistake of believing that the size of a trade (for example £5 per point or €25 per point) is what matters. They often believe that they are more successful if they are placing large trades but often the opposite is true.
The size of your position should be directly related to the size of your account.
It sounds obvious, I know, but it’s essential to understand that the smaller your account is, the smaller your positions should be.
How Large Is Your Stop Loss?
Your stop loss should be a crucial consideration to your position size.
You should be setting a stop loss on every trade. The stop loss is the emergency exit for when your trade is on fire, and believe me, you don’t want to get trapped in a trade that’s on fire. It can completely wipe a trading account out and I know, i’ve been there more than once.
If two trades have the same position size but one has a stop loss of 25 points on the DAX and the other has a stop loss of 100 points, which one will cost more money when it’s stopped out? In reality, the trade with a 100 point stop loss should have a position size four-times smaller than the first trade, because it’s risking four-times as much.
So What’s The Best Position Size?
Here’s the blueprint.
1. How Much Are You Trading?
Do you have £10,000, or $25,000 or €5,000, how much availability equity do you have in your account?
2. How Much Do You Want To Risk?
0.5% – 1.0% of your trading account if you are conservative (like me).
1.0% – 5.0% of your trading account if you are aggressive (and happy to go bust eventually if it goes wrong).
Studies prove that over the long term, traders who risk more than 2% of their capital in any one trade are not normally successful.
3. How Big Is Your Stop Loss?
Calculate the number of points that you want to risk on the trade.
On the DAX I like somewhere between 20 – 30 points for a short-term trade. Perhaps I go for 50-75 points on a longer-term trade. Scalp trades may only be 5 – 10 points for a trade. It depends on your style of trading and what you’re strategy is comfortable using.
4. How Much Is Your Minimum Lot/Contract Size?
If you wanted to trade the minimum size with your broker, how much (per point of movement) would that trade cost? For example, with some DAX CFD brokers, the minimum lot size would equate to €0.25 per point and sometimes it’s €1 per point of movement. In the UK, with spread betting, it can be as low as £0.10 per point (approximately €0.12).
So how much does the minimum trade size cost, per point, in your currency, with your broker?
5. The Answer
Use my handy tool to choose the best position size or copy and paste this link: https://thedaxtrader.co.uk/calculator.html.
Best Position Size Example
Let’s imagine that you have €10,000 of trading capital and your strategy is 2% risk. This means that €200 of your trading capital is an appropriate amount to risk per trade.
When analysing the German DAX market you spot an opportunity to sell the DAX at €12,200 and you feel there’s a good chance it’s going to trade down to €12,100. Perhaps you also see strong resistance just below €12,250 and feel like €12,250 is a good level to place your stop loss. This gives you a reward to risk ratio of 2:1, which is reasonable. You are trading CFD with a minimum contract size of €1 per point.
You have everything you need to run those numbers through the calculator
Once you have that information it is relatively easy to determine the contract size with the formula included in my calculator.
The 2% risk amount, as covered above is €200. The minimum risk per contract is €1 per point and the trade is risking 50 points, which means €50 per contract.
Using this calculation method, the best position size is to open up 4 contracts.
The advantages to this style of position size are that it allows both large and small accounts to grow steadily because it equalises performance by actual risk. Conversely, it will reject some trades because the risk is too high.