Original subtitles

Calculating the Position Size Once we have determined the quality of the

it is time to assign a risk percentage to the size of our account.

Since we do not know what the result of the next trade will be, and with the

basic premise of preserving capital in mind, we must calculate the optimal size

of each position so we risk just the right amount to maximize the potential

profit, while keeping the risk under control.

Particularly important is the premise that we do not know what the result of

next trade will be.

Therefore, the amount we risk should not depend on whether the previous trade

was a winning or losing one.

Each trade is independent.

Only the capital we have at that moment should be taken into account when taking

any decisions.

We often hear that we shouldn't risk more than 2, 3, or 4 % of the capital in

our account, but we are never told why, and for this reason, many traders assume

that it is too low an amount, which leads them to leverage more and

lose capital. Well, in this section, We are going to look at the statistical

logic of why you should not risk, in my point of view, more than 2 % of the

account, and why, preferably, you should only risk 1%. To analyze this logic, we

are going to look at the concepts of drawdown, losing streaks, and the

implications of the percentage that is risked.

A drawdown is simply a peak -to -cross decline of the capital curve when we

suffer a losing streak.

For example, this is my yield curve for the last three years.

As we can see, I have gone through three significant drawdowns, the largest of

which represents a drop of 15 .42 % of my total account and covering 87 days

from the startup until a new maximum high.

Understanding this concept is important in order to reinforce the idea that risk

management is a vital element in any trading system.

Meanwhile, there is also the concept of losing streaks. This is very simple.

and yet there are many people who choose not to understand it.

Due to the nature of markets and our potential for failed decision -making,

is excruciatingly easy to suffer five or more losing trades in a row, one loss

after another.

Really, really easy. And if we don't manage the risk properly, we may find

ourselves in a situation from which it is very hard to recover.

If you have been in the markets for a long time, you will have already

experienced this.

And if you have not suffered it yet, I guarantee that it's only a matter of

time.

Optimal risk management requires a statistical mindset and the use of

data to verify these concepts.

Where am I going with all this?

This table shows what percentage of profit we need in order to recover from

particular loss.

If we lose 10 % of the capital in the account, we need to obtain a return of

.1 % to reach the baseline prior to the drawdown.

But of course, this becomes more difficult as the loss percentage

For example, to recover from a 50 % loss, we would need to double the amount

the account. In other words, make 100 % of the capital that we had at that

point. No easy task.

As we have seen, recovering from a loss of 50 % of our capital would mean having

to double the account.

Almost certainly impossible.

since suffering that level of loss implies that you are likely following a

trading strategy that really isn't exploiting an advantage. In other words,

losing strategy in the long term.

So let's say that a maximum loss that a system can suffer, which is potentially

recoverable, would be one with a drawdown of 20 or up to 30%. Now, how

reach those drawdown levels depending on the risk we assume per trade?

This is what we see in the following tables.

By risking 1 % of our capital per trade, we can allow ourselves a losing streak

of 23 trades to reach a drawdown of 20 .6 % at that point.

Easy to understand, right?

But what if we risk 2 %?

Well, in that case, we would have already reached this percentage after

trades. And what if we risk 5 % per trade?

Well, with only 5 losing trades, we would have already exceeded the

limit. Herein lies the importance of maintaining a low risk per trade

percentage. And I repeat, suffering 5 consecutive losing trades is very easy.

So, be careful with the risk percentage you decide to apply.

Now that we are clear about why we should only risk 1 or 2 % of our

let's look at how we determine the amount that corresponds to this

To do this, we will continue to work with the TradingView platform.

We have already seen how useful it is during this course.

But one of the most powerful aspects of the platform is its easy -to -use

position management feature.

I have personally tried many platforms in the past and none have had anything

useful as this tool.

To access it, simply go to the side menu on the left and select the item which

gives us the following dropdown.

Depending on what we want to do, buy or sell, we will select a long position or

short position.

Obviously, you will need to have a broker account connected to TradingView.

In my case, I use the broker TradeStation.

I have also tried other integrations with Interactive Brokers and AMP, and it

has always worked perfectly.

Then, click on the chart and the following interface will appear in red

green. Then, you simply have to move the anchor points to precisely position the

entry price, the stop loss, and the take profit.

Let's imagine that we are observing a small reaccumulation structure and that

this good candlestick appears, which breaks through the previous lows and

generates a potential spring.

We like the look of this opportunity and we want to take it.

We would set the entry order just above the trigger candlestick, which would be

a buy stop order, to be executed at the point where the candlestick is broken.

We would also establish the stop loss order below the same trigger

and finally we would place the take profit in the first large liquidity zone

that we can see to the left in that previous maximum pivot once we have

our setup we need to right click somewhere on this interface and click

option to create a new order and the position configuration box is

filled in in this section we can select the percentage that we are going to risk

in this trade as we can see i have put two percent of my total account which

would represent a risk in monetary units of $467 .16 and would establish a total

position size of 687 units.

This box is just great. If you modify any of these three parameters, the

the monetary risk, or the percentage, the other two elements are automatically

recalculated, which makes things much easier.

In the aforementioned interface, there is another item of information that

be worth looking at, which is the risk -reward ratio.

As we can see, this trade would present a ratio of 1 to 3.

That means it would have obtained three times the risk assumed.

As we know, the risk is represented by the distance between the entry point and

the stop loss, while the profit is the distance between the entry point and the

TP.

It also offers us the possibility of not establishing the take profit or stop

loss level from the start. Simply by removing the selection, it would

from the chart and the order would not be launched.

As with every platform, I recommend you spend some time familiarizing yourself

with it. Set up a demo account and test different order setting scenarios so

that you can control the order launch, modification, and deletion protocol at

all times.

If you are using a different platform that does not have this tool, you can

always do the calculations manually or better yet, use an external tool.

There are a multitude of tools available on the internet that facilitate the

task of calculating the position size.

Here are three examples for Forex, Futures, and Stocks.

Although, if you can, my recommendation, regardless of whether it is on

TradingView or on another platform, is that for convenience, you use a tool

the one we have just seen that's integrated within the same platform.