Risk Management Chapter 2

We started this series of articles last week and it is going to take us on a trader's journey to learn how to manage risk and how to become a profitable trader.

Position sizing continued...

Fixed $$$ Amount

This stop loss strategy is very similar to the one discussed last week. However, it is better suited to some different strategies where the stop loss may vary from trade to trade.

The rule is that depending on how many ticks your stop loss needs, you need to calculate how many contracts your trade will enter with.

Let's do a real world example and explain how it works.

You are trading MES and you see a setup forming on your Price Action strategy. Your entry will be at 5,145.00 and you need a stop loss at 5,151.00, which means you need a 6 point/24 tick buffer between your entry and your stop loss. How do you find the right number of contracts when you have decided to risk only $100?

You don't want to do a lot of heavy calculations when you have a million other things to take care of when you are trading. I see 2 solutions. One is you can buy a trading tool that will do all the math for you automatically, or you can prepare a spreadsheet that you can use to quickly look up how many contracts are allowed for that risk set up. In this example the correct answer is 2 MES contracts.

Streamline risk assessment through automation

Alternatively, you can use software tools to simplify the process. There are various add-ons and indicators available that handle the complex calculations for you. For instance, the TradePanel below allows you to select the entry and stop loss points directly on the chart. It then computes the appropriate contract size based on your preferences, which could be a set percentage of your trading account balance or a specific dollar amount. While the tool below isn't free, it can provide a return on your investment when utilized properly.