Calculating and taking the proper position size is a crucial element of trading success. The position size is how many units you are going to take for a new trade. For stocks the unit is shares, for futures the unit is contrats and for Forex the unit is typically lots. If you take too big of a position you could get a big loss and possibility blow out your account.
To calculate the number of unit to trade you need these variables:
- Risk dollar amount
- Quantity of ticks to risk
- Dollar value per tick of the instrument you will trade
Risk dollar amount
The risk dollar amount is how much dollar you are willing to spend (loose) to take a trade and figure out if the trade is working or not. The risk dollar amount is typically either a Percentage of the account balance or a fixed dollar amount.
Percentage of account balance
This method of calculating the dollar amount to risk per trade is very popular. You simply take the account balance value that you multiply by a fixed percentage. As your account value grows, the risk amount per trade will increase. If you get into a drawdown period, as the account balance value diminishes, the risk amount per trade will reduce.
Fixed dollar amount
With the fixed dollar amount method you simply select a dollar amount you are willing to spend (loose) per trade and this amount remains constant regardless if you account balance increases or reduces. There might be different reasons to use fixed dollar amount like stress related to bigger risk amount per trade or the strategy might not be scalable.
Quantity of ticks to risk
The quantity of ticks to risk is determined by the difference between the price at which you will open the trade and the price at which you will close that trade with a loss divided by the tick size. The tick size is the minimum price variation of the instrument. You can measure the instrument tick quantity from 2 price points on most trading platform. With NinjaTrader you can use the built in Ruler drawing tool and select Tick to measure the number of ticks from 2 price points.
Calculating the quantity of ticks to risk means you pre-determine the point of exit for each trade or in other words your stop loss location. This is a mandatory step.
Dollar value per tick of the instrument you will trade
The Dollar value per tick is specific for the instrument you want to trade. The tick size value is available from the exchange the instrument you want to trade is traded or regulated. For NYSE, the Regulation Rule 7.6 states the following: “The minimum price variation (“MPV”) for quoting and entry of orders in securities traded on the Exchange is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for quoting and entry of orders is $0.0001.” For Futures the CME Group website list the “Dollar value of one tick” under the contract specs. Here is the example for ES which is $12.50 per tick.
The dollar value per tick might be available on your trading platform. With NinjaTrader from the Control Center select Tools then Instrument, select the instrument you want to trade. Here is an example for ES:
The Tick size is the smallest price increment and the Point value is how much dollar a point is. To get the dollar per tick you multiply the Point value by the Tick size ie 50 * 0.25 = $12.50 per tick.
Calculate the Position Size for a trade
The position size is calculated by taking the risk dollar amount divided by the quantity of ticks to risk (tick distance to stop loss) divided by the instrument dollar value per tick. If you want to risk $100 to trade SPY stock and your stop loss is $0.50 lower from your entry price which is 50 ticks, and SPY tick value is $0.01 per tick, divide $100 by 50 ticks and divide by $0.01 per tick which is giving you 200 shares.
This Post Has 4 Comments
HI….love what i saw on youtube on how fast this script can be executed.
Am finding ways to reach you as i would like to ask if it is possible to have one that works on Market Orders.
I.e. ….. i just need to indicate where the stop risk is and the next button i click….the script instantly calculates the share size based on the most current price from the stop price and instantly execute a market order.
Hope to hear from you…thank you so much
The Market Order to enter has been added to version 11. The user guide under the GUIDE tab explain how to use it but it basically works as you described. You draw the Stop Loss, you draw the Entry the Target can be draw manually or automatically calculated by a reward to risk ratio. Then, with the proper option set from the tool, when you press the Shift key, the Entry price will move to follow the current market price. When you are ready to place a Market Order, you just click away from the Position Sizing drawing tool while holding down the Shift key. If the Shift key if not down when you click away from the tool a Limit or Stop order will be placed. It’s fast and convenient.
Hello, i just subscribed to your tools, the position size tool is AWESOME, its only lacking one feature. i would like to be able to open market orders, and the tool will calculate the risk based on SL distance, PLEASE MAKE IT HAPPEN!, thank you!
Thank you for your feedback. The Market Order to enter has been added to version 11. The user guide under the GUIDE tab explain how to use it.