1st Model: Buy 100 shares of every trade Profit: $32,567.The only thing that changes is the amount of money on each trade. Note all of the different models look at the same trades. He selects some shares and trades $1,000,000 in and out of these stocks over a five-year period. Van Tharp compares a number of different methods for calculating the position size or parcel size to use. This means that if you have capital of $50,000, the maximum you should lose on any trade is 2% of $50,000 or $1000. It is accepted in the trading world that the maximum amount of capital you can risk on any trade is 2%. Van Tharp, in his excellent book “Trade Your Way to Financial Freedom”, addresses the issue of risk management or as he calls it position sizing. Strategy 1 and 2 are widely covered in most trading books and articles, so let’s take a look at strategy three in more detail, which comes down to position sizing secrets.
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