Importance of Position Sizing

                             

Position sizing is one of the most important components of successful trading more important than strategy itself.

Explaining with an example:
Nifty Index Trending system with a Win-ratio of 50%, average profit is 120 points, and this system generates a loss of 80 points over the long term.When it does lose, it loses less than what it makes when it wins.

System result for random 6 trades:

Trade NoProfit/Loss (Points)
Trade1110 Profit
Trade2-70 Loss
Trade3-80 Loss
Trade4130 Profit
Trade5-90 Loss
Trade6120 Profit
Total120 Profit (Points)

These System given to 3 different traders to trade with, the results are shown below;

Trader 1

Trade NoPointsNifty Trade SizeProfit/Loss
111075Rs.8250
2-7075Rs.-5250
3-8075Rs.-6000
413075Rs.9750
5-9075Rs.-6750
612075Rs.9000
TotalRs.9000

Trader 2

Trade NoPointsNifty Trade SizeProfit/Loss
1110150Rs.16500
2-70150Rs.-10500
3-80150Rs.-12000
4130150Rs.19500
5-90150Rs.-13500
6120150Rs.18000
TotalRs.18000

Trader 3

Trade NoPointsNifty Trade SizeProfit/Loss
111075Rs.8250
2- 70225Rs.-15750
3-80150Rs.-12000
413075Rs.9750
5-90225Rs.-20250
612075Rs.9000
TotalRs.-21000

As the system is the same for all traders, when they bring us back the trading results of the entry and exit points for each trade is going to be the same, leaving them only the position size as the factor that they can tweak.The end results shows how a successful trading system makes different profitability because of Position sizing.

Reference:Van Tharp position sizing

 

ArunRam

ArunRam

Professional Derivative Trader With Over A Decade of Experience. Previously worked in an Engineering and Mathematical background.

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