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Financial Markets & Financial Software The Skill-Builder for Financial Trading - Financial Training Software.

Trading / Investing based on Technical Analysis

To summarise:

Trading Example

Position-Sizing: Medium / large accounts.

I recommend that no more than 1% of capital be risked on an individual trade (entry-price to initial stop). This relatively conservative policy ensures survival in the face of either a sudden massive adverse move or an extended series of "Nickel & Dime" losses. This limit can be increased (say to 2.5%) if only one position is carried at a time.

Aggressive traders (many of whom fail to survive) risk much more: remember that if a draw-down of 50% is suffered the trader then has to gain 100% on his remaining capital to get back to where he started. Minimising losses is much more important than maximising profits.

The position-size to take (assuming a policy which precludes adding to positions) is therefore: 1% - 2.5% of capital / $ per single-contract point / no of points to stop.

Position-Sizing: Small accounts.

With commission and slippage realistically costing +/- $50 / trade, how can someone with a limited starting capital of say $5,000 enter this game since $100 - $250 stops are not realistic ?

Stop trading (fire your money-manager) if somewhere between 33 and 50% (decide in advance) of your risk capital is lost - you/he are incompetent !

The answer is to approach the problem slightly differently, but still in a disciplined and business-like fashion, as follows:

A person who implements this type of strategy may spend a long time with capital fluctuating between $5,000 and $15,000, but has an excellent chance of long-term success because: Obviously the above numbers are not "cast in stone", but the general idea is sound. As in many other areas of life, one starts by paying for education and experience, and then one profits from it. The more structured and disciplined the approach, the quicker the pay-back is likely to be.

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Financial Markets & Financial Software. The Skill-Builder for Financial Trading - Financial Training Software.