Here’s a follow-up question from Abhishek K. (used with permission) to my recent post on two position sizing approaches.
Abhishek:
When the sizing is based on stop, are you risking a fixed % of your capital every trade? If so, how much do you recommend: 1%, 2%, or 5% per trade?
Dave:
Yes, with most strategies, I risk a certain amount of capital with every trade.
This is different than the total amount of money at work for a given trade.
This is a crucial concept to understand.
The amount at risk is the important part – the total money at work is almost irrelevant for good trading system design.
Here’s a hypothetical example from the Get Systematic Roadmap I offer:
- You go long 1000 shares of AAPL at $186 with a stop price of $176. You exit with a profit of $1900.
- You go long 1000 shares of AAPL at $186 with a stop price of $185. You exit with a profit of $1900.
One of those trades is a LOT better than the other.
Can you tell which one?
Tomorrow I’ll address the meat of Abhishek’s question about the percent of account size to risk.
-Dave
