Chapter 6 - Entry strategies and Position Size
Position Size
“The trade capital exposure per contract is 6.5 points (1441.75 – 1435.25) or $325
(6.5 × $50). If you have a $20,000 account, what is the maximum position size?
Three percent of $20,000 equals $600.
Dividing $600 by $325, and rounding up, your answer is two contracts.
You can have a maximum of two contracts for this trade. If you were to put in a buy-stop order to enter a long trade for more than two contracts, you have no business with a trading account. You don’t understand one of the most important principles of the business of trading: capital preservation”
- Both strategies require the market to move in the anticipated direction before the trade is entered. (and there’s your secret sauce right there, ladies and gentlemen. Momentum, not fibs, time fibs, stochastics, waves or anything else. Just plain old momentum.)
Trailing One-Bar Entry and Stop
- The trailing one-bar-high (or low) entry (Tr-1BH/L) “is very simple and logical”
- Enters a trade with a close stop
- Once setup conditions are in place, trail the buystop or sellstop to enter one tick above the high or below the low of the last completed bar.
- Stops placed one tick above or below the swing high or low
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- “There is probably no better trending market than forex” (curious statement, at least these days)
Entry strategy 2: swing entry and stop
- Much like the preceding strategy but this one requires the market to take out a swing high or low in the direction of the anticipated trend.
- Capital exposure is usually greater because the entry price is further away from the initial protective stop
- so may not be suitable for a smaller futures account
- Great for an unleveraged SPY index/mutual fund position
- Should have a higher rate of success
- Not to be confused with swing trading
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Position Size
- Successful traders always have a relatively close stop.
- It is absolutely critical to minimize losses and preserve capital
- The best professional traders rarely have a greater than 50% win record
- Most amateur traders simply don’t accept this reality, which is why they are not ruthless about limiting the potential loss on any one trade.
- “Listen up, reader. If you have better than a 50% winning trade percentage over time, you are among the trader elite. If you get good at trading, you will have around a 30 to 40% win percentage. That is why it is absolutely, positively, unquestionably critical that the losses on losing trades are relatively small and profits on winning trades are relatively large. There is no other way to trading success.” (seems closed-minded to me, however I can certainly understand sticking with what you know)
- There are many complicated methods to determine position size but the simplest is the best
- Gann said never risk more than 10% of account capital on a position
- Miner says over the years he’s learned 10% is too much
- “Three percent maximum capital exposure on any one trade and
- 6% maximum exposure on all open trades is the accepted standard, and it is a good one.”
- “The maximum exposure should be a percentage of the account equity available. If your available equity is $20,000, the maximum capital exposure on a trade should be $600 ($20,000 × 3 percent). The maximum capital exposure on all open trades should be $1,200 ($20,000 × 6 percent). It’s that simple. If you go over these limits, you are stacking the odds of success against you and you are not conducting your business of trading in a responsible manner.”
- Also have a max loss per month; when reached, stop trading for that month
- No more than 10%
- Maximum position size is a function of maximum initial capital exposure per trade unit.
- First, calculate the maximum trade capital exposure of 3% of available account balance
- Then calculate the capital exposure per unit based on the objective entry price and initial protective stop. The unit could be a futures contract or per share.
- Finally, divide the maximum account capital exposure by the trade unit capital exposure to arrive at the maximum position size for the trade.
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“The trade capital exposure per contract is 6.5 points (1441.75 – 1435.25) or $325
(6.5 × $50). If you have a $20,000 account, what is the maximum position size?
Three percent of $20,000 equals $600.
Dividing $600 by $325, and rounding up, your answer is two contracts.
You can have a maximum of two contracts for this trade. If you were to put in a buy-stop order to enter a long trade for more than two contracts, you have no business with a trading account. You don’t understand one of the most important principles of the business of trading: capital preservation”
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- Sadly, Miner’s website seems to be out of commission (since 2017) so the spreadsheet he uses cannot be downloaded. I cannot find the link to it on the archived copy of his site either. However you likely won't find a simpler money management system (besides running on instinct) so a spreadsheet isn't really necessary.
- Solid advice, for the most part. I think max trade risk really depends a lot on the chosen strategy, and if your strategy is mostly random, as is Miner’s (by his own admission) you are well advised to minimize exposure.
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