Do you need to know how to calculate your position size or is it ok to rely on position size calculators. Thanks.
Hello Luis, and welcome to this forum.
It isn’t necessary to know the formula for calculating position sizes, unless (like me) you just need to know how things work.
The formula has a number of elements, which combine to determine one result –
In order for your chosen stop-loss to match your chosen risk percentage,
your position size needs to be such-and-such.
At a minimum, you should know how those 3 variables – stop-loss, risk percentage, and position size – relate to one another.
Specifically, you should know (without having to do any calculations) that increasing your stop-loss means reducing your position size. And you should know that these 2 variables are inversely proportional, meaning that if you multiply the size of your stop-loss by x, you will have to divide the size of your position by x.
Finally, you should know (without having to do any calculations) that increasing your risk percentage means increasing your position size. And you should know that these 2 variables are directly proportional, meaning that if you multiply your risk percentage by x, you will be multiplying the corresponding position size by x, as well.
Beyond knowing how those 3 variables – stop-loss, risk percentage, and position size – relate to one another, you can leave the actual number-crunching to the Position Size Calculator.
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Hi Luis, i’m using the smallest lots for trading. It prevent big loss on trade.
You are correct. One certainly doesn’t need to know how to compute lot size. There are plenty of calculators out there that will do the job for you.
However, it could be strongly argued that if you don’t understand how to preform this simplest of tasks then speculating period is not for you.
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Hi, the best position size is actually based on the volatility of the instrument you’re trading. ATR is the best thing you can use to tell you what the daily range / vol is.
Position size calculators don’t usually consider the vol so you could end up with the the calculator telling you to open positions in two different markets and two different vols but with a the same position size.
This matters since for example you could trade Gold future with an ATR of 25 so on the standard futures contract that’s a range of $2500 per contract. At the same time, Con futures, the ATR might be 4 which is a range of $200 per contract.
Your position size cal might tell you to trade with 1 contract but you’ll get 2 massively different results. Of course, the vol and position size is impacted but your account size.
Does that make sense?
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