Lesson 4

Position Sizing
Risk Management
Automate Trading With Orders

By Adam Khoo
[email protected]

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Position Sizing
• Position sizing is the part of your trading system that tells you how many
contracts to buy/sell per trade.

• Position sizing will help you to determine

• How many contracts to go long/short for a particular trades
• Your risk per trade and overall risk to your portfolio
• Your expected returns to your portfolio

STRATEGY

10%

30% PSYCHOLOGY
POSITION 60%
SIZING

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Position Sizing
Step to Calculating Position Size

Step 1) Check Your Net Liquidation (i.e. Capital)

•Example: $10,000
Step 2) Determine your Risk per trade?
•‘Risk’ refers to the maximum loss per trade
•This is the maximum you can lose if your stop loss is hit
•This loss should never be more than 1%-3% of your capital
•In other words, never risk more than 1%-3% of your capital on any one
investment
•Example: Risk per trade 1%

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Adam Khoo Learning Technologies Group Pte Ltd 2017
Position Sizing
3) Determine Your Position Size for Each Trade

$10,000 1%

No. of Lots = Net Liquidation x %Risk Per Trade

Stop loss Distance x $Value-per-pip

0.5 contracts 20 pips e.g. US$10 for EURUSD

= EUR 50,000

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Determine Your Position Size

Step 1: Determine Your Account Equity (Capital)
For Example, $10,000
Step 2: Determine Your Risk Per Trade
For Example, Risk 3% of Capital
This means that in a losing trade, I am prepared to lose 3% x $10,000 = $300
Step 3: Determine Your Stop Loss Distance
For example, your Stop Loss distance is 30 pips
Step 4: Calculate The Number of Lots to Trade

Number of Lots = Net Liquidation x % Risk Per Trade

(Stop Loss Distance) x ($Value-per-pip)
= $10,000 x 3% = 1 lot = EUR 100,000
30 pips x $10

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Determine Your Position Size

•Note: Regardless of where you place your stop loss, your risk remains the same
(e.g. 3% of your capital)
•Determine your stop loss first, then you can calculate the number of lots to trade
•The Number of lots traded is inversely proportional to the stop loss
•The further the stop loss, the smaller the number of lots
•The nearer the stop loss, the greater the number of lots

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Using Position Sizing Calculators

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Risk Management & Position Sizing

Target
Target price
price
30 pips
15 pips 1.5R
1.5R
Entry Entry
10 pips = Risk 1%-3% of Capital
1R Stop 20 pips = Risk 1%-3% of Capital
Loss 1R
Stop
Loss

No matter where you place your stop loss, your risk

per trade remains the same
Risk Management & Position Sizing

• Risk management ensures that you keep your losses small and you will always
have enough equity to keep trading in the event of a losing streak.
Rules of Risk Management
• Always risk a fixed percentage of your capital (e.g. 1%-3%)
• at 1% risk of capital , If 4 losses in a row -> 4% drawdown
• at 3% risk of capital, If 4 losses in a row -> 12% drawdown
• at 10% risk of capital, if 4 losses in a row -> 40% drawdown
• Always use a stop loss order
• allows us to pre-determine the amount of loss in a losing trade
• Always use a take profit order
• allows us to pre-determine the profit in a winning trade
• Always ensure Risk-to-return ratio is at least 1:1.5
• Trading success is balancing win rate and risk/return ratio
• The better the risk/return ratio, the lower the win rate
Risk Management & Position Sizing


• Take no more than 2 concurrent trades at a time

• Concurrent trades should NOT be correlated (e.g. Long EURUSD, Short USDJPY)
• Take a maximum of 3 trades a day
Position Sizing
5) Determine Your Expectancy & Your Expected Return
• What is your expectancy (edge) per investment?

Expectancy per Trade =

= % Win x (Average Win) - % Loss x (Average Loss)
= 55% x (Average Win) - 45% x (Average Loss)

Example
• Average loss = 1% x $10,000 = $100
• Average Win = 1.5% x $10,000 = $150

• Expectancy per trade = 55% ($150) - 45% ($100)

= $82.50 - $45 = $37.50 per trade
• 20 trades a month = $37.50 x 20 =$750
• Return on Capital = $750 = 7.5% per month (>100% a year)
$10,000
Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Position Sizing
The Concept of R-Multiples
• Successful traders think in terms of ‘R’ multiples
• 1R is a unit of risk
• 1R = Maximum Risk per Trade = 1%-3% of Capital
• A losing trades results in -1R
• A winning trade results in +1.5R or more

Using R- Multiples to Calculate Expectancy

Expectancy per trade = (55% x 1.5R) - (45% x 1R)
= 0.825R - 0.45R = 0.375 R
If you do 20 trades a month = 20 x 0.375R = 7.5R
If every 1R = 1% of capital, 7.5R = +7.5% Return
If every 1R = 2% of capital, 7.5R = +15% Return (high volatility)
If every 1R = 3% of capital, 7.5R = +22.5% Return (Very high volatility)

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Position Sizing
Use the Simulation Program to look at
potential drawdowns and returns
Broker Buys Broker Sells
BID ASK SPREAD


The Price The Price

You sell at You Buy At
Lesson 4
Position Sizing
Risk Management
Automate Trading With Orders

By Adam Khoo
[email protected]

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Types of Orders

1) Market Orders (MKT)
•A market order is used for instant execution (buy/sell)
•When you buy at Market, You buy at the ASK PRICE
•When you sell at Market, you sell at the BID Price
•Guaranteed fill BUT not guaranteed price.
• I rarely use market orders to enter a trade
Types of Orders

2) Limit Orders
• This is a pending order
• Buy and sell at a specified Limit price or better
• The price is guaranteed but your order is not guaranteed to be filled
• Buy limit order@ 1.3505 -> Execute buy at 1.3505 or at a lower price
• Sell limit order @1.3505 -> Execute sell at 1.3505 or at higher price
• I usually use Limit Orders to Take Profit
Types of Orders

3) Stop Orders
•This is a pending order that converts into a market order when a specified stop price is
reached or exceeded

a. Stop Orders Used to Enter a Trade

•Buy Stop Order used to enter Long Trades
•Sell Stop Order used to enter Short Trades

ØFor BUY STOP orders, the desired Stop orders are used to enter
entry price must be higher than the when there’s further
confirmation of price
current price. movements

ØFor SELL STOP orders, the desired

entry price must be lower than the
current price.
Types of Orders


b. Stop Orders Used to Exit At a Loss (Stop Loss)

•It is used to minimise losses if the price moves against you.
•Sell Stop Orders are used for long positions
•Buy Stop Orders are used for short positions

Long Trade Short Trade

Stop Loss: Buy Stop 1.3240

Entry: Buy Stop 1.3230

Entry: Sell Stop 1.3230

Stop Loss: Sell Stop 1.3210

Types of Orders


DAY and GTC Orders

•DAY Orders are automatically canceled at the end of a trading day if
they are not executed. GTC (Good Till Canceled) Orders are in force
until executed or canceled by the trader.

•DAY orders are used to enter a new trade (long or short)

•GTC orders are used for Stop Loss and Take Profit Orders
Placing Orders for Long Setups
•Professional Traders place bracket orders (OCO), where an entry
order has a profit target and stop loss attached.
•GTC: Good Till Cancelled

Sell Limit Order 1.3265

GTC
1.5R =
15 pips

Buy Stop Order 1.3250

1R = Day
10 pips
Sell stop GTC 1.3240
Bracket Order for Long Entry

Sell Limit
1.2198
12 pips
Buy stop
8 pips 1.2186
Sell stop
1.2178

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Placing Orders for Short Setups
• Professional Traders place bracket (OCO) orders, where an entry order
has a profit target and stop loss attached.
• GTC: Good Till Cancelled

Buy Stop Order 1.2030

1R = GTC

Sell Stop Order 1.2020

Day
1.5R =

Buy Limit Order 1.2005

GTC
Bracket Order for Short Entry

Buy Limit
12 pips 109.20
Sell stop
8 pips 109.12

Buy stop
109.00
Using Limit Orders for Entry-
When price has already moved beyond intended entry price

ØFor BUY LIMIT orders, the desired entry price must be lower
than the current price.

ØFor SELL LIMIT orders, the desired entry price must be higher
than the current price.
Bracket Order for Long Entry

Sell Limit
1.2198
12 pips
Buy stop
8 pips 1.2186
Sell stop
1.2178

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Bracket Order for Short Entry

Buy Limit
12 pips 109.20
Sell stop
8 pips 109.12

Buy stop
109.00
Lesson 4
Position Sizing
Risk Management
Automate Trading With Orders

By Adam Khoo
[email protected]

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017