We keep on talking about position size but what does it actually mean? The size of your position is nothing other than the number of contracts you trade on CFD’s or the number of shares you buy on equities. In other words, the exposure you have to one instrument in a trade. A risk strategy is key in trading or investing if you don’t want to wipe your account.
When we talk about investing we mean the actual shares/equity you buy and sell, and when we talk about CFD’s, you buy/sell contracts but the underlying instrument reflects the actual share.
If you want to understand CFD’s a little more then please feel free to watch this video here: https://frans-de-klerk-independent-technical-analysts.ck.page/a4416e79f8
In this post, we want to talk about position size for CFD’s. We are going to try to keep it as simple as possible.
Step 1. Determine your risk factor. Let’s say you have R10 000 in the account and let’s say you decide to risk 3% of your capital on every trade you take. This means 3% of R10 000 = R300. This is the amount you are prepared to risk on every trade you take. As a beginner, you make this even smaller and start with a 2% risk factor.
Step 2. Determine and set your stop loss. Look at the graph for your instrument of choice and establish where you would implement your stop loss. You can use support/resistance levels, moving averages, Bollinger bands, and any other indicator to determine the stop loss level. Let’s say you want to enter this share at R100 and you have identified your stop loss level as R82 which means you will have a stop loss of R18 (R100 minus R82) per share. Assuming this is a long position and you believe the instrument is going to go up.
Step 3. Quantify the number of contracts. Take the R300 amount you have calculated in step 1 and divide that by R18 per share which will give you the number of contracts you are prepared to take on this trade. In this case, R300/18 = 16.666 and we usually round the figure off which means we are going to open 16 contracts on this CFD trade. Why? Because the maximum amount we want to lose on any trade is R300. You will NEVER win on every trade and if you do let me know what juice you are drinking. The successful traders aim to have more wins than losses.
If you are still not sure how to determine your position size to trade CFD’s then please send us an email at firstname.lastname@example.org