Position Sizing – How Important Is This To Your Trades And How To Be Smart About It
Position Sizing – How Important Is This To Your Trades And How To Be Smart About It
Most people start investing without a proper research on exactly how much they can invest. Make no mistake, the “how much” part is just as important as where you should invest. Think this way: let’s say you split up your equity in two different investments that your manager recommended you. In the first one you put around 80% of your equity and then in the other one you put the remaining 20%. It would be great if both funds made a huge gain and you earned a lot of money, but that is not usually the case, is it? So let’s analyze what would happen in some common situations.
Position Sizing – An Example
Imagine that the fund that you invested 20% of your equity made some big right investments and it made a total profit of 100% on top of your money in one year. Isn’t that great? It is. But wait, what happened to the other part of your equity, the other 80%? Say that in the fund you invested most part of your equity, the fund manager was a corrupt fellow and made some really, really poor decision and then, by the end of the year, you lost all the money you had in this account. What is your net result? That is right; you lost money in the end.
That has happened because you most part of your cash allocated in the wrong fund and believe me, this is really common to happen. Maybe it has even happened to you: you started two trades, in the first you bought twice as much as the second one only to see the second one soaring in value! It is a pain to endure that but then it may as well teach you a lesson on how important position sizing it.
Conclusion
When trading the markets there are several factors you need to balance in order to be successful. It is not easy I’d say, but you do have to do your homework. Sometimes you will be browsing around the web, looking for interesting articles and setups for certain market conditions. That is fine, but next time you are reading one of these, search if the author says or even mentions something about position sizing. Most don’t and that is a big mistake. From the example above, you have seen how important a good position sizing is. So, next time you are thinking of starting a trade, spend the same amount of time in the search of a good setup as you spend in deciding on HOW MUCH you should put in that trade.
