Position sizing is critical for managing risk. Too often, traders take on too large positions in the hope of making big and fast. This is wrong. Trading is a marathon and not a sprint, and position sizing should reflect that.
For trading our Model, we find that on EUR 10,000 account the best position is EUR 1 per point. And we would have up to three positions in the instrument, e.g. Dax, that we would scale into. The total position if we scale in over three entries would then be EUR 3 per point.
Never risk more than 2% of your account on any one position. On a EUR 10,000 account at EUR 1 per point position, this would be a 200 point stop loss, maximum. If traders of the Model scale in over multiple entries the cumulative risk, in terms of where to put a ‘hard stop’ should be no more than 5% of your account capital. This is higher than many other trading tutors recommend, but we find that as the model has a high hit rate, this higher level of risk is justifiable and indeed optimal.
Traders should use stop alerts to notify them when key levels are reached. This helps stay on top of the market as it moves.
We also suggest that cumulative risk should apply whenever you have positions in correlated markets. For example, if you are long Dax and SPX, you have correlated exposure long indices – manage position size and stop loss accordingly.