Position Sizing For Trading - Futures & Forex

Summary

Highlights

• Position sizing is fundamental for effective trading strategies. 📉
• Proper size management can prevent substantial losses. 💰
• Fixed dollar or percentage risks help control unpredictable factors and results. 🔍
• Spreadsheets and trading tools simplify position sizing calculations. 📊
• Considering drawdowns is essential for prop firm accounts. ⚠️

Key Takeaways

• Position sizing is crucial for profitability, not just win rates or risk-reward ratios. 📊
• Consistent position sizing ensures that tables of win rates and risk-rewards are effective. 📈
• Using fixed dollar or percentage risk is preferable over fixed contract sizes. ⚖️
• Calculation tools and spreadsheets help streamline the process of determining position sizes. 🛠️
• Strategies differ for general and prop firm accounts, focusing on drawdown limits. 💼

Overview

Chapters

• 00:00 - 00:30: Introduction to Position Sizing and its Importance The chapter introduces the concept of position sizing in the context of trading and emphasizes its importance. While many focus on the correlation between win rate and risk to reward (RIS), the chapter argues that without proper position sizing, this correlation is ineffective. The chapter promises a detailed exploration using a PDF document.
• 00:30 - 01:00: Win Rate and Risk to Reward Table This chapter explains the relationship between win rates, risk-reward ratios, and profitability in trading. It presents a table that pairs different win rates with fixed risk-reward ratios to determine when a trading strategy becomes profitable. For instance, a strategy with a 20% win rate and a 1:1 risk-reward ratio is not profitable, but one with a 40% win rate and a 1:2 risk-reward ratio is profitable. The effectiveness of this table assumes a consistent risk per trade. The example given involves using a fixed 1:2 risk-reward system with an expected 50% win rate, assuming a risk of $11,000 per trade.
• 01:00 - 01:30: Example of Fixed Position Sizing The chapter discusses the concept of fixed position sizing in trading. It provides an example where a trader takes a first trade that results in a loss of 1 risk unit (or $1,000). In the next trade, maintaining the same position size and risking $1,000, the trader gains 2 risk units (or $2,000). Consequently, the trader ends up with a net gain of 1 risk unit (or $1,000). The example illustrates that with a fixed 1:2 risk-to-reward system and a 50% win rate, trading can be profitable.
• 01:30 - 02:00: Inconsistent Position Sizing Issues The chapter addresses the challenges and consequences of inconsistent position sizing in trading. It uses an example where a trader risks different amounts on consecutive trades, leading to a situation where gains do not offset losses due to inconsistent risk levels. The chapter emphasizes the importance of maintaining consistent position sizes, such as keeping the same contract size per trade, to ensure that the trading strategy works effectively.
• 02:00 - 02:30: Ways to Position Size The chapter discusses different ways to determine position sizing in trading, highlighting two primary methods: fixed dollar amount and fixed percentage. These methods involve risking the same dollar value or percentage per trade. The chapter contrasts these with using a fixed contract size method. An example given involves using two NQ contracts per trade, with scenarios illustrating the risk management involved in terms of points and dollar amounts.
• 02:30 - 03:30: Fixed Contract Size vs. Fixed Dollar or Percentage Risk In this chapter, the discussion centers around the differences between trading with a fixed contract size versus fixed dollar or percentage risk. The example provided illustrates a trading scenario involving NQ contracts with varying risk levels - $1,600 and $400. It highlights the inconsistency in risk management when the risk size fluctuates. This inconsistency poses a problem because losses and gains are not proportionate to the risk taken. For instance, if the first two trades incur a loss of $800 and $600 respectively, and the last trade wins with a risk of $400, the inconsistent risk results in a total not as advantageous despite the win. The chapter emphasizes the importance of maintaining consistent risk to ensure proportionate returns irrespective of individual trade outcomes.
• 03:30 - 04:30: Determining Contract Sizes for Futures The speaker discusses the preference for using fixed dollar risk over fixed contract sizes in trading futures. The rationale is to adjust contract size per trade to maintain a consistent risk of $1,000 or 1 R. The speaker refers to previous trades where the risk was consistently managed at this level, emphasizing the strategy's importance in regulating exposure and potential losses.
• 04:30 - 06:00: Calculating Position Sizes Manually and Tools The chapter focuses on the concept of calculating position sizes manually and using tools for consistent trading results. It highlights an example where the trader loses the first two trades, each costing 1 R or $1,000. However, by position sizing correctly, the last trade gains 4 R, resulting in an overall profit of 2 R or $2,000, despite prior losses. The chapter aims to explain how to determine the appropriate number of contracts to take.
• 06:00 - 07:30: Futures and Forex Position Sizing Calculators In this chapter, the speaker discusses the simplicity of using CFDs (Contracts for Differences) due to their allowance for decimal usage, as opposed to Futures contracts where fractional contracts are not possible. This limitation is why they prefer using micro contracts for Futures, for greater flexibility in adjusting position sizes. The speaker aims to manage a risk level close to $11,000. They calculate the number of contracts or micros needed by considering their defined risk (in this chapter, $1,000) and the value per point for the instrument, specifically mentioning the NQ (Nasdaq 100) with a value of $20 per point, alongside their stop.
• 07:30 - 10:30: Using TradingView's Risk Reward Tool In this chapter, the usage of TradingView's Risk Reward tool is explained through examples of trading with the NQ futures contract. The chapter illustrates how to calculate the number of contracts based on risk and point stop size. For a risk of $11,000 with a 20-point stop size, the calculation is 1,000 (NQ's value per point) divided by the stop size, giving 2.5 contracts. The concept of converting these contracts to micro-contracts by adjusting the decimal or multiplying by 10 is also addressed. In an example with a 40-point stop size, the methodology remains consistent.
• 10:30 - 12:00: Position Sizing in Futures Prop Firm Accounts The chapter discusses the concept of position sizing in futures prop firm accounts using an example of calculating micro contracts. It explains the manual calculation method of position size, considering risk amounts and point values. The example provided involves risking $1,000, with calculations leading to 5 NQ contracts or 50 micros. Although manual calculations are possible, the chapter suggests that there are simpler methods, including the use of calculators and tools, and mentions that the author has created two helpful spreadsheets.
• 12:00 - 13:00: Conclusion and Personal Tips In this chapter, the speaker discusses using calculators to determine position size when trading futures contracts. They mention specific contracts such as NQ and ES, detailing their point values ($20 and $50 per point, respectively). The speaker advises on entering account size and desired risk per trade into the calculator to determine the risk R per trade.

Position Sizing For Trading - Futures & Forex Transcription

• 00:00 - 00:30 [Music] how's it going everyone this video is going to be about position sizing now a lot of people talk about the correlation between win rate and RIS reward however what they don't talk about is proper position sizing now without proper position sizing the correlation between win rate and risk to reward does not work out so let's hop into a PDF and go over this now here we are with a win
• 00:30 - 01:00 rate and risk to reward table so what this shows is what win rate paired with what fixed risk to reward equals profitability so for example here if you have a 20% win rate in a 1:1 risk reward it's not profitable however if you have a 1:2 risk reward with a 40% win rate then you are profitable now this table only works out if you have the same risk per trade now why is that well let's take for example I'm using a fixed 1 to2 R system and have an expected win rate of 50% assuming a risk of $11,000 per
• 01:00 - 01:30 trade if I take my first trade and it is a loser I'm down 1 r or $1,000 now if I take my next trade and it is a winner keeping the same position size risking $1,000 I'm up 2 r or $2,000 adding those together I'm up 1 r or $11,000 so you can see with a fixed 1 to2 R system at a 50% win rate it is profitable now let's say I was using the same fixed 1 to2 R system with a 50% win rate however I was not keeping consistent position sizing
• 01:30 - 02:00 for example on the first trade instead of risking 1,000 I risk 2,000 after taking that loss I am now Down 2 r or 2,000 but then on the next trade when I'm risking 1,000 and hit a 2R trade instead of being up 1 R I'm at break even so you can see how this table only works out with consistent position sizing now there are a few ways I can position size I can look to keep my contract size the exact same for example risking two NQ contracts per trade or I
• 02:00 - 02:30 can look to do a fixed dollar or fixed percentage which is where I risk the same dollar value or same percentage value per trade let's hop into our first slide where we go over what it looks like to keep the contract size the same and why I prefer the other two methods let's take a look at using fixed contract size so in this case I'm going to be looking at using two inq contracts for every trade or each scenario in this first example risking 20 points with two NQ contracts that gives me a risk of $800 here I'm risking 40 points with two
• 02:30 - 03:00 NQ contracts that gives me a risk of $1,600 then here I'm risking 10 points with two NQ contracts which gives me a risk of $400 so you can see that this risk size is all over the place and not consistent so why is this a problem well let's say we were to take a loss on these first two trades right so on this first trade -1 r - 800 right here -1 R -600 and then we win this last trade which is a 4 our trade however we are only risking $400 so we only make $1,600
• 03:00 - 03:30 due to the inconsistent sizing although we should be up to R we're down $800 let's go to the next slide and see why I prefer fixed dollar risk over having fixed contract sizes Now when using fixed dollar risk or fixed percentage risk I'm going to adjust the contract size per trade to maintain a fixed risk of $1,000 so you can see throughout each of these trades I have a risk of $1,000 or 1 R now let's use the previous example where we lost the first two
• 03:30 - 04:00 trades and then one the last one and see how this works out with consistent position sizing and then we'll discuss how to determine our position size so using that example losing the first two trades you can see down one r or $1,000 now I'm down another r or another $1,000 but on this last trade because I'm position size correctly this 4r is actually 4 R and so then I end up being up 2 r or $2,000 when in compared to the last slide we were down $800 so how do I determine how many contracts I take well
• 04:00 - 04:30 it's really easy with cfds because I can just use decimals however with Futures contracts you can't have half a contract and this is why I like to use micros because it allows more flexibility in my position size I want to get as close to that $11,000 of risk as possible now how do I determine how many contracts or micros I need to take well I use my defined risk in this case $1,000 my value per point for the instrument so on NQ that's $20 per point and then my stop
• 04:30 - 05:00 size so in this first example risking $11,000 and a 20 point stop I have 1,000 divided by 20 because that's NQ and then divide by 20 which is my stop size which gives me 2.5 contract now if I want to get from contracts to micros I just move the decimal over one or multiply by 10 so in this next example with 40 points of risk I would take 1,000 ID 20 which is nq's value per point and then my stop size of 40 which gives me
• 05:00 - 05:30 1.25 or If I multiply by 10 12.5 micros and since I can't take half a micro I would round down personally and then here in this last example risking 1,000 M Q's value is 20 per point and I have a 10o stop which gives me 5 NQ contracts or 50 micros now although I know how to calculate my position size manually it does take time and there are easier ways to do it now there are a lot of calculators and tools out there I've gone ahead and created two spreadsheets
• 05:30 - 06:00 which I will link in the description below that are very simple calculators for calculating position size I'll do a brief overview of both of those here now taking a look at the Futures calculator here the first thing I want to do is fill out which contracts I generally trade and the value per point for them so you can see NQ has $20 per Point es $50 per point the next thing I'm going to do is fill out the account size I am trading in my desired risk per trade it will then calculate my risk R per trade
• 06:00 - 06:30 in a dollar value and then taking a look at the table below here I can see that with what stop size how many contracts I should be taking so for example here on Mees if I have a fivepoint stop I'm going to be taking 10 contracts if I have a Sixpoint stop I'll be taking eight contracts I go over to M andq you can see if I have a 15-point stop I'll have eight contracts 20 point stop six contracts and if this doesn't go out far enough I can just go in and adjust it
• 06:30 - 07:00 such as so drag it down and determine my stop size I need now taking a look at the Forex calculator the first thing I want to do is figure out with my broker what is the price per pip or per point for each instrument that I am trading and fill them out in this table here from here I then go choose my account size or type it in so if I have a 100K account I'll just adjust that here my desired risk per trade and then it will spit out a fixed dollar risk then selecting which instrument I am looking
• 07:00 - 07:30 to trade my stop size in pip or points and then it will give me a lot size for that trade now with both of these sheets make sure you file make a copy or else you won't be able to adjust any of this info and please do not request access as it just sends me a bunch of emails now the next thing I want to discuss is using trading views risk reward tool to determine position size so you can see here I have an entry a stop so I want to double click in here and make sure this information's all correct let's say I have a 100K account risking 1% now
• 07:30 - 08:00 because I'm in Forex with EU I want to make this lot size 1,000 so from here you can see it spits out a quantity of 14.92% EU on 100K account I can load
• 08:00 - 08:30 this template in and it will be correct now if I was going to do a similar thing on Futures and in this case the NASDAQ I'm going to have to adjust the settings in the risk to reward tool so you can see with our current settings on the Forex it's giving a quantity of 03 so I need to adjust that and for futures I use a one in the lot size and then this is giving me the correct quantity so to risk $1,000 with this stop size I need 2.81 7 contracts or if
• 08:30 - 09:00 I'm going to be using micros 28 micros now before I do anything I will want to save this as a template for a 100K account on index Futures and for this trade I would have to take 2.18 contracts however you cannot do that with minis so we will drop down to the micros to take 28 and I'll show you some stuff there so looking at the same trade on the micros here you can see our quantity is now 28 and that's because
• 09:00 - 09:30 micros are on10th of a mini now the cool thing you can do in trading view with the risk to reward tool is when you hit create a limit order on this already created risk to reward tool you can see how much you're going to risk with your stop and take profit you can see I'm risking $994,000 with position sizing than using
• 09:30 - 10:00 minis last thing I'm going to quickly discuss is position sizing with Futures prop firm accounts let's say I get a 25k account do I have access to $25,000 no I really have a $1,500 account because that is the drawdown size so if I was going to risk 1% of this account size how much am I actually risking I'm risking 177% of the draw down size if I was to lose six or seven trades in a row then that account is blown so generally on Futures prop firms
• 10:00 - 10:30 I'm not looking to risk 1% of the overall account size instead I am focused on the draw down amount so for a 25k account I have $1,500 in draw down I put that over here and then from here I can see risking what percent of the draw down gives me how many trades until I lose the account so I want to look between 10 and 7% generally on these accounts CU that gives me 10 to 15 trades that I can lose in a row before losing the account then going back to sheet one I will adjust this from the
• 10:30 - 11:00 account size to the draw down size and then I will adjust the risk per trade from 7 to 10% and that is how I personally do it now what I talked about there is for evaluations generally once funded I lower my risk which gives me the ability to lose more trades and have a larger cushion and with Forex prop firms the concept is exactly the same it just is different numbers I hope you found this video helpful and insightful if you did please consider like and subscribing and I'll see you guys next
• 11:00 - 11:30 week