I was coaching a long time student last night and it occurred to me that most traders do not consider proper position sizing when trading. In fact, most beginning traders have no clue what I’m talking about because they just pile money into each trade, one at a time and see what happens.

Really it’s like betting all on black in Las Vegas – either you make it big or you don’t. Those are not the odds I want…

Position sizing when trading is of course subjective. What can be good for one trader could be bad for another. But you still need to have something in place and so I decided to put together this very quick guide.

Share your own personal position sizing rules, thoughts, etc in the comments to let other traders see what you are doing.

Set A Firm Stop Loss Level

There must be a place on the charts where you call it quits. This is the area where the charts via technical analysis tell you that it was a bad trade and you were wrong. Remember, we are all going to have losses; it’s the traders that learn from them that prosper.

To determine position sizing you must first set a firm stop level. As a rule of thumb, a trader should not risk more than 1-3% on a single trade. Less is better, but don’t put your stop too close so that any minor movement in the market will hit it quickly. Larger accounts are likely to risk much less than 1% of capital on many trades.

Be Consistent With Your Positions

If you really want to develop a great system then you have to be consistent with position sizing. For example, if you are risking 4% of your money per trade then always risk 4% unless you change your rules. There is no trade out there that is SO great that it requires more money than your max risk per trade – period.

Let’s look at two examples…

$10,000 Account Position Sizing

As a simple example for educational purposes, let’s assume you have $10,000 to trade with. You have decided that you can have a maximum loss of $200 if we risk 2% of our capital on each trade. Doesn’t sound like much money but if you cannot manage $5,000 effectively how are you going to manage $500,000 one day?

To determine how many option contracts to buy we take our 2% investment of $200 and divide it by the price of the call/put. If the call/put is trading for $20 each then we are going to only buy 10 contracts.

Once we have our position sizing all figured out, we have our stop set on each trade at a 2% max loss. If it’s hit then we are done and get out – bad trade, move on and forget about it. If the position starts to turn a profit however then consider moving up your stop loss to lock in the profit. Simple right!

$100,000 Account Position Sizing

Things change when you have more money. You have to be even more risk adverse and protective over your portfolio. Believe me; I lost $10,000+ the very first week I was trading at home. I thought I was a big shot and didn’t have a plan laid out and paid big time for this valuable experience. Therefore it was much quicker to lose money.

If you have a $100,000 account let’s assume that you only want to risk 1% or $1,000 per trade. Larger accounts should of course be risking less per trade unless you are a crazy day trading cowboy.

But the same method above is applied to this larger account. You take your max risk per trade and divide it buy the number of contracts you want to buy. Using the same price as above, if the call/put is trading for $20 then we would need to buy more than 50 contracts!

Larger accounts that trade this many contracts can also benefit from cheaper commissions and better use of account margin requirements. Still, you need to make sure that you are properly addressing your risk tolerance level. Have a system and work the system!

How Do You Size Your Positions?

Whether we risk a percentage of our account on each trade, or choose a fixed dollar amount we all do it differently. Don’t be bashful in sharing your own personal view on position sizes, stop loss, allocation in the comments section. You can also ask for help and suggestions on position sizing for a particular trade or account you have…

The typical list of success traits always includes characteristics such as discipline, focus, passion, commitment, determination, and confidence. Again these can be found almost anywhere and in any book you read. When applied right they can act as a framework for achieving success in all aspects of your life.

I also intentionally left out #14 on this amazing list for you to add your comments and share your ideas on what makes a successful trader (or not).

But what I’m talking about here specifically are the characteristics that relate to trading for a living. During my time at Deutsche Bank and BB&T I had the opportunity to watch and be coached by some very successful traders. Then when I started coaching people 4 years ago it only reaffirmed the qualities that separate the “successful” from the “unsuccessful” traders.

1. Discipline Is All Or Nothing

One cannot be disciplined up to a certain point and yet call themselves disciplined. It’s all or nothing. Either you are going to be a trader or you are not. Discipline needs to be exercised at all times and not sometimes only. This doesn’t mean you focus 100% of your day on trading – that would be crazy – but that you are 110% committed to becoming better over time.

2. Losing Is Welcomed To Learn From

You will lose money – and the sooner you accept this fact the quicker you move on. Since everyone losses money, the thing that separates great traders from bad ones is that great traders learn from the losses. Welcome the opportunity to advance your strategy or adjust your trading plan after a loss. Here’s an example of one that happened to me recently.

3. Never-Ending Student Of The Markets

The markets are changing every day and you need to fully understand how it works.  As it’s changing you have to learn to evolve and change with it. Sometimes this requires adjustments on your part. The moment you engage to learning new things, there will always be good opportunities which will be opening up.

4. Unique Trading Personality

You are an individual and your trading should reflect that. Trading has a way of uncovering the personality of individuals by making them trade outside their comfort zones. So it is very crucial to match your personality with the right kind of trading.

5. Can Separate News Hype From Reality

It is a crucial trait for you to know how to think for oneself without being influenced by the media and the news. All the great traders normally know how to think for themselves on some level. This is why I tell every person who signs up for a members that I don’t want them around for 5-10 years (that means they haven’t learned anything). You need to be honest with yourself, make personal decisions and reach your own conclusions.

6. Simple, Yet Clear Planning

It is more likely for a trader to be successful if you have a plan than if you don’t have one. What are your goals and how will you get there? How will your protect yourself from losses and at what point will you take profits? What will you do with your winnings? There are countless questions to ask here.

7. Proactive And Not Re-Active

Probably the most important on this list! A trader needs to know how dangerous it can be if you overreact and make quick decisions without thinking. The ability for you to become a better decision maker will arise from experience gained in trading. Be proactive in knowing every possible move ahead of time and don’t just react to what the market gives you.

8. Commitment To Learning What You Fear

The most attractive things in life comes from the most unattractive activities in life. Most successful traders have developed over the years a sense of “status-quo” in their plan. They got burned by options before and will NEVER trade them again. Well, you need to learn about options and futures and stocks and forex so that you understand how they all work to affect each other. Don’t be afraid to re-learn!

9. Being Patience With The Markets

A successful trader will be quick to take losses and slow to make profits. Beginners take profits quickly because they’ve never had them before and fear losing them. Wealth isn’t built in a day or a week – it is slowly accumulated with consistent trading strategies.

10. Remaining Extremely Humble

Okay so I goofed and this one does apply to life also. But still holds true that you need to be a persona of humility and respect. Give to others and you will receive.

11. Keeping Accurate Trading Records

Having the right records to refer from will avoid a trader from making wrong decisions and thus avoiding losses. Keep accurate records of your trading book.

12. Balancing Your Life Outside

The ultimate goal off any trader is to make money and be financially independent (or at least that’s my goal). However, it should be understood that life needs to be enjoyed and not suffered in the name of sacrificing for the sake of trading. Go to the gym, take a walk, do something other than sit in front of the trading screen all day for God’s sake!

13. Trade To Live, Don’t Live To Trade

If you’re serious about trading for a living, working to incorporate these traits is a step closer towards your goal. Starting small and determining why you want to become a trader in the first place will help drive you through the tough times as they are inevitable. Just as I mentioned in #1, the determined and disciplined trader will make it in the end!

14. Reader’s Choice

Now it’s your turn to add your comments and let me know what YOU think makes a successful trader. I’m sure that there are qualities here that I haven’t even thought of yet. Maybe there are some characteristics that “bad traders” exhibit which makes them unsuccessful…

I’m always testing and analyzing new trading strategies. Well, maybe not new strategies per say but at least new techniques, entry points, risk management, etc. For the past 2 months I’ve been testing a new strategy with a small trade that hasn’t gone as well as I’d like and I wanted to share it with you…

I’m a fan of learning by doing! You can read all the books you want but nothing compares in the stock market to actually putting money at risk and seeing how your strategy or trading system works. Like when we were kids, you just have to play around until you find out what works.

You know by now that I’m always 100% open with my trading. I’ll show you our monthly performance and also the really bad trades I’ve had as well. Frankly it makes me a better trader knowing that I have to be accountable to you. And hopefully you can learn from me as well – or at least learn to avoid some of these pitfalls.

ENTRY: Short 3 SLV October 19 Puts for $35

When I entered this trade SLV was still in the process of falling hard from it’s highs. It had moved from near $50 to $35 in just 4 short days. As such the implied volatility was still high though not as high as it had been at the top.

The 3 contracts had a total premium of $105 and required an initial margin of approx. $950. The return on this was 11.6%. Not bad right? Well, this was for the entire 169 days, some on a monthly basis it was more like 2.06%.

My Strategy Going Into The Trade

My strategy was to sell the naked options far OTM and deep in contract expiration. At the time (May 5th) the October contracts were more than 169 days away – usually not what I do with my trading strategy but again I was testing something new here…

Although it had no time decay of Theta, the volatility premium was fairly high and I expected a short term bounce in SLV in the coming weeks. The overall strategy was to enter the trade with enough room so that if SLV kept falling I would be okay, but to try and quickly take advantage of the volatility.

Honestly I hadn’t planned on being in the trade longer than 2-3 weeks at most. The return I was shooting for was the 2.06% on a monthly basis (or a little higher) by quickly entering and exiting the trade.

Current SLV Position…

As it stands right now I’m still short the 3 SLV October 19 Puts. They have come down in premium to $21 per contract and are only taking up $634 in margin. This is a 40% decrease in the premium over the last 40 days – not bad but also not what I was expecting.

Per the chart, the main problem I had with the trade is that I didn’t get out when I had mapped out the trading plan. The first move higher as expected in late May would have been the ideal exit and the premium at that time was down to $12 per contract.

This would have been both the 1 month timeline I was planning for and also a great return – $24 in premium capture with $950 in margin = 2.42%.

Since SLV has basically moved sideways which I account for the premium decay I got thus far. Virtually no Delta move helped me at least at this point; it was mainly volatility.

I Should Have Recycled My Money

I’m still making money on this trade but I went wrong by not correctly exiting. I still have the position open right now. The Theta is still worthless at this point since we are still 129 days out from expiration but there is good Vega premium left on the table.

In my opinion the best investors are the ones who can quickly and efficiently recycle their money. It’s not about day trading to recycle money, it’s about using margin and premium in the best possible way whether that means trading for 4 days or 4 months. The question for me is always, “What is the best possible use of my money right now?”

Looking back it was a good strategy to test out and I have learned from it. Now I’ll take this nugget of knowledge and apply it to the next strategy and so on. As always, I’ll be here sharing these experiences and lessons with you in the coming weeks and months!

Was This Helpful? Share Your Feedback/Comments/Experiences…

Japanese candlestick patterns have been around for centuries. Originally they were used by merchants to help them predict and profit from rice trading. I guess you can say that they have really passed the test and are a “seasoned” tool for any financial market. If they weren’t somewhat reliable then they would have faded away many years ago – but they are more useful today than ever!

History is not a favorite past time for traders. Most traders don’t care what happened in the past, they only focus on where the market is going now. For me, I’m an avid student of the markets. I’ve read a lot of books about early trading in the 30’s and 40’s as well as some of the more “modern” theories of technical analysis and portfolio management. This quick history of Candlestick Patterns hopefully will help shed some light on how to really use them to profit.

18th Century Rice Trading

While there are accounts of candlesticks being used as far back as the 17th century, the first detailed documentation of candlestick patterns can be traced back to an 18th century Japanese businessman named Munehisa Homma. Munehisa used candlesticks to chart and track rice contracts.

Everyone at the time was tracking rice contracts, but what he did was take an emotional approach to the market – analyzing fear, greed, and the herd mentality. He found a way to accurately observe the behavior of the masses and manipulate them to his advantage.

He tracked the opening and closing price along with the high and low of the day and placed them on a chart. This graphic representation was a series of columns that looked like candlesticks, hence the name.

He took an extremely chaotic market and brought some order and insight to why prices did what they did. The patterns that repeated themselves over and over again became his bedrock for future price moves. Homma made huge contributions to early candlestick charting.

There are some reports and sources that say he would consistently make dozens of profitable trades. I wish I had that sort of success with SLV last month. Rumors are that he gained the equivalent of over $10 billion in today’s dollars. He could have very well been the most successful trader in all of history…

Where Did The Crazy Names Come From?

Remember, we are still in 18th century Japan here. Munehisa needed a way to link the chart patterns to some visual concept – the tug of war between buyers and sellers in the market. With this, he labeled the names of specific candlestick patterns from mostly military concepts.

Today some of these patterns have kept their Japanese names such as the Doji Star, Harami, and Tasuki. Others have been translated into an English equivalent like the Abandoned Baby or Hanging Man. Either way, the patterns are still the same today as they were back then and just as powerful for your trading.

How To Easily Find Patterns

If you are just starting out it may be hard to find reliable patterns right? Well now most brokers have a tool that lets you scan for particular candlestick patterns instantly and accurately. Pretty damn cool I know…

Now you should have a basic understanding of how to find advanced candlestick patterns and use them to profit. The patterns and strategies I talked about above are only a few of the many candlestick patterns that can help you become a more reliable and consistent trader.

Mr. Candlestick – Steve Nison

As always, give credit where credit is due…

In 1989, Steve Nison published an article in Futures Magazine that first introduced the western world to candlestick patterns. He is still very active and remains one of the foremost experts on candlestick patterns. Since the growth of candlestick patterns has really taken off since 2000 with more and more investors trading online.

If you are into day trading or swing trading these days then you must know two things, technical analysis and candlestick patterns. Both of these tools are a must if you want to become a winning trader no matter what market you like to trade or what contracts or instruments you want to trade.

To tell you truth, in the beginning, you might get overwhelmed by the number of technical indicators that are available. What you need to do is to choose only two or three and then master them. One should be a trending indicator and the other should be a ranging indicator. I think, mastering three indicators is the best for you. Don’t go for more than three indicators.

What’s up with all these social media companies filling for IPO’s lately? I guess the spark was lit with LinkedIn which went public just 2 weeks ago now. Since 2 other major social media tech companies have filed the paperwork for additional IPO’s – both Groupon and now Zynga.

Coming Social Media Bubble?

I hate to say the “B” word so early but of just the 5 companies that are planned to go public, the combined market value is north of $71 Billion. As you can see from the chart below, on a per company basis that is a extremely high even when compared to 1999 bubble levels.

Facebook does clearly make up the lion’s share, but even LinkedIn is now worth more than the initial $2 Billion estimate on this chart – $7.6 Billion as of last Friday’s close.

LinkedIn LNKD IPO Dud

LinkedIn, which went public last month, revealed that it earned just $15 million in 2010. Prior to that, LinkedIn was in the red every year since its 2003 inception — except for a slight profit in 2006. Really it’s no wonder why the stock has basically

Next In Line Please…Groupon

We have already had some heated discussions about Groupon on our Facebook Fan Page this weekend…

Groupon’s river of red ink is even deeper than LinkedIn’s and yet the buzz is already swirling. Groupon filed for its IPO on Thursday, revealing that it lost $413 million in 2010 and lost almost $114 million in the first quarter of 2011. Yet current predictions are that the company will be valued at more than $20 Billion on it’s IPO day?

What Do YOU Think?

Do you think we are in another “bubble in the making?” Add your comments below – irronically via Facebook – on whether you think we are in the early stages of a Social Media bubble?

Pretty heavy question here, but one that needs to be asked…Are wealthy or rich investors always the smartest or most intelligent investors? With the likes of Bernie Madoff these days who have wrecked lives, it would be hard to quickly answer YES.

Sure it depends on what we are talking about here. I mean you also have to wonder how Madoff got away with so much for so long – clearly he was “smart” enough to allude the SEC for years during the Ponzi Scheme.

What I’m taking about here is strictly regarding the investments they make…

Does Money Buy Information?

To me being wealthy means having access to information that other, non-wealthy, investors wouldn’t get. Is this the ultimate source of investment growth and performance? If you have a deep understanding and knowledge of a company or industry, don’t you have an edge over other market participants?

Take Warren Buffett and Jay-Z for example – yes I said Jay-Z! The two recently sat down together at the Forbes 400 meeting last year. Whether you know it or not, Jay-Z is a wildly successful businessman.

Both of these guys have access to a lot of information. Does this make them intelligent or just privileged? Add your comments below with your opinion.

Either way I think it’s great that you can bring together these two and it just drives home that fact that wealthy investors can come from very different backgrounds yet achieve relative success.

SEC Accredited Investors

Now there is a classification on whether you are “smart” enough to invest on a higher level. According to the SEC, only rich or wealthy people should be considered intelligent enough to either understand complex private investments or to hire someone that is competent to explain it to them.

I’d beg to differ that a lot of readers here are extremely smart and understand much more than someone else who meets the accredited investor guidelines.

Do The Rich Get Richer?

I say yes of course they do. But that doesn’t mean that you or I can’t get to that level. Being an accredited investor does have it’s perks, namely to invest in private companies like Facebook and Twitter.

Shares of just these two social media giants have been trading on SecondMarket.com for a while now. And you can rest assured that those wealthy investors who own shares during any IPO’s are going to make millions and millions overnight.

I’m Leaving This Open To Debate

I have my own opinions but I’d like to hear yours. Do you think that wealthy or rich investors are intelligent? Add your comments via Facebook below.