Deciding how much of your money to risk is essential to making profits and minimizing losses. This is known as position, trade or bet sizing and betting strategy. If performed well, it will ensure that your capital stays with you rather than spread-betting companies for as long as is possible, even in the face of a succession of losing trades.
Spread bettors generally stake the same amount on every trade. Overtrading is cited as the cause of a minimum of 90 percent of trading failures. People who have only recently succumbed to the entreaties of such companies as Cantor Index and opened a spread betting account are especially prone to staking too much on one trade. Steve Griffiths, a trader of 25 years’ standing, said that position sizing is little understood and consequently under-used. Van Tharp’s Definitive Guide to Position Sizing” is a book on the subject that is recommended by many, including spread betting guru, Malcolm Pryor. If it is not available from the likes of Amazon and Global Investor, it can be obtained directly from Dr Tharp’s own website, www.vantharp.com/products.asp.
The optimal position size depends on a person’s outlook towards risk preferences and investment objectives. Someone may seek to double their account at the risk of losing half of it, or achieve a ten percent return while risking no more than five percent of their money.
If your bet is too large, one price movement can easily wipe out a substantial proportion of your capital. It can also make a trader more susceptible to emotions, which clouds judgement. If a trader cannot arrive at a decision, additional losses can occur. The most successful traders never risk more than a certain fraction of their money on one trade. Usually, this is between two and eight percent, according to the experience of the trader and the nature of the asset. In books such as Market Wizards, almost all the interviewees use a position size of a mere one percent. If your account shrinks, so should the amount you risk.
Spread betting companies do not generally offer bets of less than £1 a point. If there were only £1,000 in your account and you were staking no more than two percent, your stop loss would have to be placed a mere 20 points away from the entry price. Such a tight stop loss would likely result in many perfectly good trades being halted, so a higher percentage would have to be risked.
If the trading size is too small, that can cause problems. Significant gains will never be made and a trader could, horror of horrors, become bored. Complacency can also arise, and a trader will be careless. In this case, small losses can amount to a significant proportion of a trader’s capital.
Position size calculators are available over the internet. These determine a figure based, for instance, on your percentage of winning and losing trades and the average amounts you win or lose on trades or on your account size, maximum percentage risk, open price and stop price.
Most professional spread traders believe that position sizing is the single most important determinant of success of failure in financial markets.
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