Newbie Revelation - Position Sizing

[Jimmy Jones]

I just wanted to share this with some of you new guys. I am sure the veteran traders already understand this.

I have not been sleeping much lately (completely engrossed in learning everything I can about forex). I was up late last night and saw a response to a post that got me thinking. The post I mention basically gave the advice of getting your trading account to a decent size ($50,000 I believe it was) and then living off what you earn.

I have really been struggling with seeing how Forex can be a viable avenue to real financial freedom. I was under the impression (the wrong impression I think) that I had to figure out a way to make a ton of pips a day just to get to the point where my trading could replace my income.

So I laying in bed last night in sheer exhaustion but unable to sleep because that post was on my mind in a heavy way. Then I remembered a conversation I had with a private hard money lender a few years back about my real estate investing activities. He had asked me what my goals with investing in real estate were, and I told him that I wanted to build up a portfolio of enough rental properties to be able to replace my salary so I could quit my job.

He looked at me like I was stupid and asked me why on earth would I want to quit my job as soon as I got to the point where rental income was matching my salary. I had no answer. He proceeded to show me the power of making your money work for you. He showed me how if I held off just a few years and put all of my profits back into my business that in a few years I would achieve real financial freedom, not just another salary.

So it hit me in bed last night. I don't need to make thousands of pips a day. What I need to do is make a small number of high probability trades on a consistence basis, and use position sizing to make my account grow faster. So my goal now is not to replace my income as fast as possible. My goal is to build my cash float up to the point where I can then take out a small percentage of it to live off of while the majority goes right back in so I can keep increasing my position size.

Let me tell you I feel much more relaxed today with that new goal in place. Now 40 - 100 pips a day looks like a real viable path to true financial freedom.

A great book I read a few years back has the same idea, getting your money to work for you. It's called The Richest Man in Babylon. A good read if you can find the time...

[tymen1]

Originally Posted by Jimmy Jones

.........................

I have not been sleeping much lately (....................). I was up late last night ...........
So I laying in bed last night in sheer exhaustion ....

Tell me about it!!

My goal is to build my cash float up to the point where I can then take out a small percentage of it to live off of while the majority goes right back in so I can keep increasing my position size.

Mmmmmm.......this is one big goal.
Do you think, with changes in world affairs, that you can achieve this in your lifetime?

Let me tell you I feel much more relaxed today with that new goal in place. Now 40 - 100 pips a day looks like a real viable path to true financial freedom

You must also take note of the days when you lose between 40-100 pips a day.

A great book I read a few years back has the same idea, getting your money to work for you. It's called The Richest Man in Babylon. A good read if you can find the time

The same as the principle of tithing one tenth of your income in the church.

[Jimmy Jones]

Originally Posted by tymen1

Mmmmmm.......this is one big goal.
Do you think, with changes in world affairs, that you can achieve this in your lifetime?

Absolutely, I believe people can achieve much more then they believe they can. And I don't think it will take a lifetime to accomplish.

Don't get me wrong, I am not saying it's an easily attainable goal, and I'm sure there will be many review sessions and small goal adjustments to reach that larger goal, but I believe with everything I am that it can be done.

When people say that one of the biggest obstacles to success in the forex market is emotions, most often greed and fear are the first things that are mentioned. However I think a much larger issue could be one's belief in their ability to succeed. Without that belief it won't matter how well you can control your fear and greed, because in the end if you have a belief that maybe you can't succeed, your brain will work overtime to make sure you get it.

And as they say, if it's worth having it's worth working for.

Another good read, The Magic of Thinking Big. I've owned it for almost 11 years now and read it at least once a year. Probably the one book I would keep if I were only allowed to own one book.

[Sweet Pip]

Yes belief and a good self image are a winning combination. If you haven't read it, then this ebook on the "Secrets of Emotion Free Trading" explains that part and gives some exercises in developing it. It's all about "Acting in your own best interest"!

I believe in the power of visualization. Although I still need to discipline myself in "doing" the exercises for my trades once my strategy is more solid, I have my compounding position sizing goals spreadsheet printout pinned to my wall for encouragement. It will happen!

[thewomb]

Originally Posted by Jimmy Jones

Another good read, The Magic of Thinking Big. I've owned it for almost 11 years now and read it at least once a year. Probably the one book I would keep if I were only allowed to own one book.

Hello, long-time lurker, first time poster here. I second this, an excellent book!!

[thewomb]

Also, thanks to Sweetpip for that ebook link.

My general plan for when I go live is thus:

To trade 1 lot where this amount allows me to place trades in my desired style without compromising my maximum loss per trade (and oh yes I shall be using stop-losses); and where this lot size allows me to observe the max loss per trade and the max account leverage rules for having open however many positions fit with my trading system.

Then after however long it should take me to double my initial account, I shall then double my lot sizes.

Bankroll is for trading only. Living expenses are not included.

The real trick is trading as best one can in order to attain enough pips to double the account size to then increase the lots. Whether this takes 1 hour or 1 year, as long as one is doing his best, observing his rules and system and learning from experience, there will be ups and downs, missed goals and drawdowns along the way but ultimately, hopefully the account can show profit and improvement.

[Jimmy Jones]

Originally Posted by thewomb

Then after however long it should take me to double my initial account, I shall then double my lot sizes.

This was the idea that sparked my topic. I have read in several places that most traders only trade 1 standard lot for every $50000 in their account.

Think of how long it would take to make $50,000 by only trading 1 standard lot at a time. If your money management rules say you only risk 2% of your bank roll, then to really use up all of that 2% at any giving time you would need several trades open at once (assuming you are indeed only using standard lot sizes instead of units).

However, if you are with a broker that allows trades sizes of whatever you wish, then you can always be using up the 2% you are willing to risk on every trade by adjusting your position size for each trade. It seems it would also work if you experience a losing streak. What if 1 lot (weather standard, mini or micro) ends up being more than 2% of your total bank roll?

Please don't take this as advice, I am just thinking out loud here and waiting to see some other views.

The idea I was trying to get across in my first post was the power of compounding position sizing.

[VulcanClassic]

Thanks Sweetpip for that e book. Pretty interesting, I'm just into the intro now, but looking forward to the rest of it.

[Sweet Pip]

You're all quite welcome

[pablopluto]

Originally Posted by Jimmy Jones

This was the idea that sparked my topic. I have read in several places that most traders only trade 1 standard lot for every $50000 in their account.

Think of how long it would take to make $50,000 by only trading 1 standard lot at a time. If your money management rules say you only risk 2% of your bank roll, then to really use up all of that 2% at any giving time you would need several trades open at once (assuming you are indeed only using standard lot sizes instead of units).

However, if you are with a broker that allows trades sizes of whatever you wish, then you can always be using up the 2% you are willing to risk on every trade by adjusting your position size for each trade. It seems it would also work if you experience a losing streak. What if 1 lot (weather standard, mini or micro) ends up being more than 2% of your total bank roll?

Please don't take this as advice, I am just thinking out loud here and waiting to see some other views.

The idea I was trying to get across in my first post was the power of compounding position sizing.

I have heard of very concervatives trading 2:1 which would be 100k:50k not only 1 lot probably when you actually traded with a pit.