Risk Based Position Sizing
Balanced Risk - the Key to a 97% Win Rate
Risk-based position sizing is a strategy where the size of a trade is determined based on the amount of capital you're willing to risk on that trade, rather than a fixed number of shares or a percentage of your portfolio. It aligns your position size with your risk tolerance and the specific trade's stop-loss distance.
Here's how it works:
Define Risk Per Trade: Decide the percentage of your total capital you're willing to lose on a single trade (e.g., 1% of a $10,000 account = $100).
Set Stop-Loss: Determine the price level where you'll exit the trade if it goes against you (e.g., buying a stock at $50 with a stop-loss at $48, meaning a $2 risk per share).
Calculate Position Size: Divide the risk per trade by the risk per share to find the number of shares to buy. Using the example: $100 ÷ $2 = 50 shares. You will lose exactly $100 if the stop is triggered.
Adjust for Account Size and Volatility: Factor in your total capital and the asset’s volatility. For volatile assets, you might reduce position size to limit risk.
Formula:
Position Size = (Account Size × Risk Percentage) ÷ (Entry Price - Stop-Loss Price)
Example:
Account size: $10,000. Risk per trade: 1% ($100).
Planned entry if the ticker breaks $50, with a stop-loss at $48:
the risk size for this trade equals $2 pr share.Position size formula: (Risk pr trade - $100) / (Risk size for this trade - $2)
$100 ÷ $2 = 50 shares ($2,500 position).In other words, you need a position size of $2,500 to risk losing $100 for this trade.
Benefits:
Limits losses to a predefined amount;
Adapts to different trade setups and market conditions;
Helps manage risk consistently across trades.
Considerations:
Requires accurate stop-loss placement;
Must account for transaction costs and slippage;
Works best in combination with Barky’s Diagonal Entry Model.
Example
ES is setting up an hourly break out. The anticipated entry is $5925 and the stop loss would be $5917. That potentially means an 8 point stop loss.
The contract size for Micro E-mini S&P 500 futures is $5 multiplied by the index value. That means $8 stop distance multiplied by $5 equals a $40 risk per contract.
If your risk size is $100 per trade, you can maximum afford 2 contracts for this trade, because with 2 contracts, you lose $80 at the stop level, while 3 contracts would exceed your standard risk by $20.
However, price pulls back and bounces at $5919, which means that the stop loss would be $2 higher than initially planned.
The stop loss is now $6 away from the entry. Still using that $100 maximum loss, a $6 stop multiplied by $5 equals $30 risk per contract. $100 divided by $30 means the tighter stop increases the position size by a full contract while the risked capital remains the same: “risk based position sizing”.
In the Discord we focus on NQ for day trades. Not in the least because NQ moves 10 to 20 points, but also because the leverage is $2 per micro contract. For small accounts it means more contracts per trade and therefore better suited for risk calibrated position sizing.
Risk/Reward
There is a challenge to consistently balance risk when you can only risk $100 per trade. If you can risk $10,000 per trade, the amount of contracts would facilitate more accurate sizing. Regardless, the principle remains the same.
In this example we would lose $90 at the stop. Consequently this also means that we have $90 profit when price reaches the 1R level as it attempts the break out. For this reason it is very important that a trade is entered exactly where planned. Hesitation delays the entry and skews risk/reward.
Position Management
Some trades offer a higher conviction than others, and this lack of conviction increases, the lower the timeframe you choose to trade. Often when we trade an M2 Diagonal Entry Model, M5 and M10 are still trending down, and we have to protect capital in case the trade goes against us.
Trade and position management works the same way on all timeframes, so we will stick with the example at hand. We have several choices we can make, to protect capital, or to generate and secure income.
Here is simple math:
Locking in 50% of the position when price hits 1R without moving the stop makes the trade risk free - you break even if you stop out;
Locking in two thirds or the position when price hits 1R without moving the stop guarantees a small win if your stop gets triggered.
Another strategy is to move the stop after price has backtested the EMA9 and take partials at the 1.7R to 2R sweet spot.
The key is to let winners ride and maximise those gains. If the EMA9 doesn’t hold, you can always close the position well before your stop is reached. The key to compounding gains is to never, ever lose more than 1R.
Three Candle Rule
It is not written in stone, but if you study price charts, then you will agree that three candles on average is where an advance exhausts. So if your trade is expanding and working, if you had no reason to lock partials just yet, you may consider locking in profits as price makes that third outside candle.
You decide how much you want to lock, but in general, locking 70% makes a generous living and takes the pressure off the exposed runners. In addition, when the setup worked, the EMA9 has to lead, and as the EMA21 passes your entry level, you can move stops to break even.
Consistency is Key
Do it the same time every time, standardise your routine and make trading incredibly boring. That is your job. Fall asleep during execution, then wake up to steak dinner. Jokes aside, consistently locking in partials during the initial break out stage has the potential to bring your win-rate up to 97% for the Diagonal Entry Model.
Such is the power of risk and position management.
You can now trade and protect capital like a pro. All that matters from here, is your understanding of the model, and your discipline to wait for all parameters to be met.
The waiting, the discipline is always the hardest. If you can be patient, and let go those trades that didn’t meet your parameters, you become part of the 1%. The other 99% struggle because their emotions overpower the technical guides as promoted by the system.
Your choice. Good luck!
