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Sizing: the key to survival
The legendary trader Ed Seykota products, who turned $ 5,000 to $ 15 million over 12 years, was teaching a course in technical trading a class in college many years ago when he decided to carry out an experiment to illustrate to students the value of money management, or sizing position – ie determining the quantity of money in any given sole risk operation – to the overall success of any trader trading plan.
He told his class they were going to compete in a contest to trade among themselves. All students begin with a hypothetical equity participation of $ 100,000. The winner, of course, the student would be more money at the end of the competition. However, there was a catch: All students buy and sell the same stocks at the same time accurate, ie, the stock could increase or decrease exactly the same amount. In fact, each shot Seykota "stock" of a hat at the front of the room, and simply told the students if they had gone up or down and by how much.
How to make a contest of negotiation when everyone buys and sells the exact same stocks in the exact same time? This is position sizing – the amount of money you're willing to bet each trade. After Seykota elected each population, but before announcing whether it has risen or fallen, each student had to write the amount of money he or she was willing to risk on this trade. Risk could be as little or as much as they wanted.
The results of the competition provided all education Seykota for students – and should be remembered by all who put their hard earned money at risk in the market. At the end of the competition for some of the students had lost its hypothetical full participation and were completely "broke." Others had come out about even, making a little money or losing a some money. But some of the best students – the finest traders – Had turned that hypothetical $ 100,000 over $ 1 million!
Think about it: Two traders start with the same amount of money and buy and sell stocks in exactly the same in the exact same time. Bankruptcy. Other brands of 1000%! Therein lies the secret of survival and success in Ultimately, as a trader. All great traders will tell you that sizing is the most important factor in its success.
So How much should you run the risk of any single commercial activity – in other words, how much should be willing to lose? It is best to risk a fixed percentage the value of your account on each trade, and not change the percentage from trade to trade. What that percentage should be dependent on several critical factors. The most critical is their terms of victories and defeats, the size of your average earnings and the size of the average loss. Given these three numbers, the size of the position will determine whether you live or die as a trader.
The point of position sizing is to be sure that will not break the bank for a loss of momentum. Even a random coin launch can produce 10 tails in a row, so make no mistake that even the best traders suffer losing streaks of equal length. If you run the risk of, say 10% of your account on each trade, and the average loss is 7%, a streak of 10 games in a row could be devastating. On the other hand, if you are a trader the day and the average loss is 0.5%, you can risk more money on each transaction without worrying about a slump that will take you out of the game.
Sykota says he never risks more than 5% of your account at any single business. Many other successful traders to risk more than 3% of your account in one operation that makes you a cowboy. A good starting point for traders start is probably 1% of your account. The added benefit of reducing risk for beginners is to help minimize the emotions that often interfere with good trade.
For a detailed discussion of sizing position, we highly recommend Van Tharp's book "Trade Your Way to Financial Freedom." A coach renowned trading, Tharp is profiled, with Seykota in "Market Wizards" by Jack Schwager classic collection of profiles of some of the traders and the brightest minds in trading of all time.
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