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POSITION SIZING And Risk Management For BEGINNERS (Trading) 馃敟馃敟 - YouTube
Channel: Trade With Trend - Raunak A
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So in today's video,
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I'm going to discuss about position
sizing and risk management and why this
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remains the cornerstone in order to
become successful in stock markets. Now,
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how do you define what position
size is? In my opinion,
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position size is that amount of
stocks you buy in the market,
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that gives you a balance between your own
psychological comfort and with respect
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to the risk that you can take as
per your account. So in other words,
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ideal position size would be something
that offers a great balance between your
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own psychological profile
and your risk profile.
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video is uploaded. Thank
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So one of the reasons why you have to
understand the importance of position
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sizing is because of the kind of
moves that happen in the market.
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Now in case you are short at this position
and you have taken positions that are
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way above the risk profile of your
account and the next day market gaps up,
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you can lose 10, 20, 30% of your
account in one single session.
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Now. Same applies in this case.
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In case you are taking a breakout
here and you go long here.
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If you do not calculate the ideal position
size as per your account during such
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market openings,
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your entire account can be wiped off
and this especially holds true if you're
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taking leverage in the market. Now,
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which is why I am going to show you how
position sizing can help you avoid such
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situations and keep you on the right
track in order to grow your account as
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years progress. Now not
many traders realize this,
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but in case you're a longterm trader,
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you need to have a different position
sizing model and in case you're a short
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term trader, your position sizing
model can be completely different.
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Now what I'm going to show you in
this video is pretty basic stuff,
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but let me tell you, as retail traders,
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these basic strategies work
exceptionally well. Now,
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once you become a full time trader and
you gain more experience in the market,
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you can then use some advanced position
sizing techniques that will help you
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develop further. So I categorize
position sizing into two strategies.
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Number one for longterm trading. And
number two for short term trading.
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So let me now take up
longterm trading first,
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that is position sizing strategy
with respect to long term trading.
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So the first position sizing strategy
that we will discuss is the equal value
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position sizing method.
Now under this method,
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you allocate the same amount of capital
to all stocks that come up in your
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radar.
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So let us assume that you have an account
size of 100,000 and for the entire
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year you would only be
trading in 20 stocks.
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So let's assume that one of these 20
stocks gives you a Buy signal or a Short
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signal. In this particular case,
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you would equally divide your
100,00 capital over 20 stocks.
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That is the number of stocks you want to
trade and then allocate that amount of
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money in that particular stock that
gives you a buy signal or a short signal.
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So when account size is 100,000 and total
number of stocks you want to hold in
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your portfolio is 20 then
you simply divide 100,000
by 20 and you get allocation
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value of 5,000 now this means that each
stock that gives you a buy signal or
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short signal you would be allocating
only 5,000 rupees or let's say dollars
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depending on where you trade
that amount in the stock.
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I hope this aspect is clear. So
as each trade qualifies for entry,
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the maximum allocation under this
method that you do is 5,000 per trade.
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So this is the main reason why this
is called equal value position sizing
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strategy.
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So one of the things that I like about
this strategy is that it's fairly easy to
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implement and you can actually include
this in your trading plan from the next
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session itself.
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Now the reason I say so this is more
suitable for passive investors and traders
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is because not everyone is a full time
trader and there are market participants
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who are doing a full
time job somewhere else.
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And for those individuals
who are indulging in long
term trading or let's say
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investing this way of position
sizing does work well.
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So let me just explain how you would be
exiting a trade based on this method.
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So let us assume you have taken
entry at this level that is 30,800.
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So the way you can exit this position
if it is not working in your favor,
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is by keeping a fixed
percentage stop loss approach.
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So under this method you can have a fixed
percentage stop-loss approach wherein
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after you've taken an entry,
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in case stock falls above 15% you can
then go ahead and exit that position.
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So while you are allocating money
in the stock based on fixed value,
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you can exit the stock based on a
fixed percentage stop-loss approach.
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I hope this aspect is scale.
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Now the second position sizing approach
that we will discussed is the equal risk
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approach. Now under this
particular approach,
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one of the first steps that you have to
determine is to identify initial stop
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loss. And then based on your account size,
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you need to calculate how much
money you want to risk per trade.
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Now this is done in percentage terms.
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So in case you're a
beginner in the market,
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what I would suggest is that don't risk
more than 0.5% or 1% of your entire
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account size. Now what I mean by this
is that in this particular example,
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I have assumed that I am
taking 2% risk per trade.
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So what I will do in order
to calculate my risk amount,
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I would calculate 2% of 100,000 in order
to determine the risk amount per trade.
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Now once I have determined
my risk amount per trade,
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I would then calculate my position
sizing based on the formula given here.
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So I would take a risk per trade figure
and divide it by the difference between
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entry and stop loss.
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So this is the main reason why you need
to be aware of your entry and stop-loss
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level and then you need
to take into account,
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how much risk you have to take in
percentage term depending on your overall
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account size. I hope this aspect is clear.
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So let me just explain this
with this particular example.
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So in this particular chart,
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the entry is visible at 780 so this
is simply a breakout trade that you're
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taking. Stop-loss is set at 760,
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so the difference between entry and
stop loss is 20 that is 780 minus 760.
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So based on the calculation that
we saw in the previous slide,
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risk amount was determined as 2000
that is 2% of overall account size.
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So your position size therefore
would be 2000 that is risk per trade,
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divided by 20, that is
difference of 780 and 760.
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So our net position size
comes out to be a hundred.
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Now typically during market
hours it becomes difficult
to calculate positions as
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the market is trading,
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because your entire focus is on
identifying the correct entry price,
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stop loss and various other factors.
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So what I've done is I have developed a
simple position sizing sheet and based
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on which position sizing
technique you prefer,
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you can simply enter the values and
get the ideal position size as per your
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account during market.
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Now developing such sheets is actually
extremely helpful for a trader because
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during the market as his entire
focus can then remain on trading.
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So let me first explain on this sheet
the first position sizing technique that
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we saw. That was the fixed
value position sizing.
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So under this technique you simply have
to enter your entire account size number
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here, you also need to enter how many
open positions you want to carry in the
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portfolio. That is, whether it is 5
position, 10 positions, or 15 position.
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And based on the number of stocks
that you want to carry here,
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this amount automatically gets adjusted.
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So let us assume you want
to carry 10 positions.
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You simply have to go and
adjust this value as 10.
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So automatically you will see
your position size number changes.
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So why this is happening,
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Because your position
sizing number depends on the
number of stocks you want to
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hold in your portfolio. So if you
just want to hold three stocks,
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your position size would automatically
increase. I hope this aspect is clear.
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So the second position sizing method
that we saw was equal risk-based position
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sizing. So under this method you
simply have to enter your account size,
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your stock entry price,
your stop loss price,
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and then you need to determine how much
money you want to risk on each trade.
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Now if you're a big now
prefer this value to be 1%.
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Now I have set this value to 2% you
can simply change it here to 1% and
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automatically the position sizing would
change. In this particular method,
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The difference between entry
price and stop loss is important,
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because it directly determines how
much position you should be taking.
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So there is also one more position
sizing method that is volatility based.
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In this particular method, you
should know your account size,
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you should know the volatility of stock.
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So the 18 value that you see here is
the ATR 14 value on a daily timeframe.
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Now this is a very standard indicator
value and this is readily available in all
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softwares. Then you need to know your
entry price. So in all these examples,
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I have taken the same entry
price, that is 190 here,
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190 here and again 190 rupees here.
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You also need to know how much
risk you will be taking per trade.
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So I'll just put this
figure back again to 1%,
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because that is what I advise
all beginners to start with.
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So finally in this particular
position sizing technique,
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your position size is finally calculated
as risk that you are willing to take
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per trade divided by
two times of ATR value.
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So in this case the risk amount is 1000,
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so 1000 will be divided
by 18 into 2, that is 36,
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so which is why you get this 28 number.
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So in the equal risk based position
sizing method, as you increase your risk,
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your position size will
change. So if I make this 3%,
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your position size automatically
changes from a 100 to 300.
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In the fixed value position sizing method,
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As I decrease the number of stocks
I want to hold in my portfolio,
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my position size number would increase.
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So if I decrease the number from 20 to 5,
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the position size value
automatically increases.
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In the volatility based
position Sizing method,
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as volatility of stock
reduces, position size goes up.
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Now this is a good method because you
want to be holding less positions when
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volatility is high. So if I
reduce the volatility to five,
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the position size number
would automatically go
up. So look at this point.
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Now if you're a beginner in the market,
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I would first suggest to begin with
fixed value position sizing if you are a
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long term trader and equal risk based
position sizing if you're a short term
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trader. Now as you graduate
to the next level in trading,
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you can then replace this fixed value
position sizing with even volatility based
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position sizing. So at the end,
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you have to figure out which
combination works best for you.
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Now this Excel sheet is readily available
with me in case any one of you wants
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it, just let me know in
the comment section below.
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So the previous Excel sheet was already
emailed to all of you who had written
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down in the comment section and in case
you haven't received that Excel sheet,
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then do let me know again.
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I will upload it in the community section
and will leave the link for the same.
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Now the whole idea of using a position
sizing strategy is to make sure that no
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trade creates such a
drawdown in your account,
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that it gets difficult to recover from.
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Now this is one of the key aspects that
most beginners do not understand when
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they are participating
in the stock market.
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Now apart from identifying
the right position size,
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you also have to determine your risk of
ruin and you have to take notes of your
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trades In terms of R multiple.
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Now I have done two videos on the
subject and the link to both these videos
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would come up towards top
right end of your screen. Now,
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if you're a beginner in the market,
you should be watching these videos,
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because these will help you
manage your overall risk better.
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