All language subtitles for VEED-subtitles_004 Position Sizing_en

In this lecture, we're going to be talking about position sizing, so we've talked about money management,

how we don't want to lose too much in our portfolio.

We've also talked about risk management, how we want to reduce the risk on a given trade.

So if we lose a few trades in a row, we don't lose too much in our portfolio.

And when we talked about risk management, we said that one of the techniques is to stop losses.

So a risk limitation technique.

And this is done by doing proper position sizing.

OK, so whenever you're placing a stop to reduce your risk, you're going to be able to calculate how

much of a position you want to take based on the level of risk you wanted.

So, for example, let's say you have an account that has ten thousand dollars.

Well, how much of that account are you willing to lose on any given trade?

Right.

How much of that ten thousand dollars are you willing to lose?

Well, we've said that if you have a good strategy, you're going to be winning about 65 percent of

the time, losing 35 percent of the time to keep it simpler.

Let's say you're winning 60 percent of the time and losing 40 percent.

So if you're losing 40 percent of the time, then, you know, it's a big chance of you on losing a

treat, let's say, for that.

Ten thousand dollars, you're willing to lose two percent.

Well, let's say no, let's say you're willing to lose 10 percent.

Well, you have a 40 percent chance of losing 10 percent.

What are the odds of you losing not only 10 percent, but not only one trade, but two trades in a row?

Well, what are the odds?

Let's calculate them providing a calculator here.

So 40 percent chance of losing 100 times then was the chance of losing another 40 percent.

So you have 16 percent chance of losing two three zero.

So 66 percent chance of losing 20 percent of your accounts.

That's huge.

Well, what's the chance of you losing a certain time in earlier times and zero point four?

Well, now we're at six percent chance of losing three trades in a row for trades in a row.

Five trades in a row, so you have one percent chance of losing five trades in a row.

Now if you're betting 10 percent of your accounts.

Each trade and you lose five trades in a row, you're losing 50 percent of your account, and we've

seen that if you lose 50 percent of your account, that's a huge hole that's going to be very hard to

dig yourself out of.

And losing five trades in a row is actually not that unlikely.

One percent, you know, what's the percentage chance?

And if you're trading for the long term, it's going to end up happening.

You are going to have five losing trades in a row.

So because of this, what we have to do is decide on a smaller maximum loss for trades.

Now, the rule of thumb is to use something around two percent.

Why, because if you lose you two percent, that if you lose five trillion or you just lost 10 percent

and that's nothing, and let's say if you lost 10 trades in a row, what are the odds of that?

So this is six trades, seven, eight, nine, 10.

So that's a very small that's a point or one percent off point or one percent, right?

It's a very small amount.

OK, so the odds of it, so it's zero point zero one percent.

That's the odds of losing, you know, 10 trades in a row for a strategy that has a 60 percent chance

of winning and 40 percent chance of losing.

Now, this can happen, right?

So if it does happen and you're betting two percent of your account.

Well, how much would you lose, you would lose 20 percent, and if you lose 20 percent, it's not the

end of the world.

You can come back from that easily.

So you don't having a Hittites max loss for trade is going to help you preserving your capital, which

is what we've said is very important.

Now, you know, the least risk you take for trade, the less amount of opposition you can get, meaning

the less money you will make as well.

So depending on your on you, you can play around with this.

So people who have bigger accounts, they're going to reduce the risk.

They're not going to take two percent risk.

Hundred thousand dollars.

You're not going to take two percent risk free trade.

You might take one or even a bit less, you know, but if you're starting off and you only have a few

hundred dollars, then you might take more risk than that.

The thing is, you have to be aware that you're taking more risk because maybe you tell yourself, look,

I have only this little amount of money.

I have to take more risk.

So I make more money and I grow my account.

And then when I grow my hand, I'm going to reduce the risk.

But the problem is, during this period, if you're taking more risk and the risk materializes, then

you will be losing that big amount.

So you have to be aware of that and you have to accept it.

Right.

If you're saying, look, I only have a few hundred dollars, a small amount and I'm taking huge risks,

OK?

But understand that the risk means something bad that can happen and that risk materializes, right?

It's not because you take risk that the bad thing isn't going to happen.

You can take risk and go, but sell your house and buy lottery tickets.

That's a risk.

You know, you want to take it not so, you know, you don't just want to take on the servers.

So what I suggest is following something like this, if you have a small account and who is a bit bigger,

OK, but, you know, my suggestion would be to still have Ditrich and instead of betting big to try

and make money, just, you know, find a way to increase that capital instead of just taking more risk

that the people who succeed are people who have risk appetite risk management in a way.

So what are the steps to calculate your position sizing based on the risk level that you're going to

take one?

Well, the first decide on your maximalist first rate, then the next steps.

Well, calculate the dollar max loss for the position, and that's going to depend on your your balance.

OK, so if you have ten thousand dollars in your account and you're willing to lose two percent, then

you're willing to lose two hundred dollars.

So here we calculate 200 bucks.

Then the next step is decide on your entry price, decide on your stop loss price, and then you're

able to have your position and we're going to do an example of that.

And then there's going to be the function for your position.

That's how many coins you're going to buy is going to be basically your maquilas in dollars, which

is two hundred divided by entry price minus plus price.

Now, later on the section, I'm going to give you an Excel sheet that can help you a bunch of the things

we're talking about in this section.

And it's also going to have a position sizing calculator.

You can put the data and it'll calculate it for you, but you want to know how it's calculated so you

can actually do it by yourself because the calculation is pretty simple.

OK, so let's say I'm looking at a coin like this.

I'm looking at eel's.

Then maybe I'm looking and let's put a different chart.

Doesn't really matter.

And maybe I'm looking at it and I see that there's a big there's a good spot here.

And this is this is I'm doing something random here.

Doesn't really matter.

It's just for us to to, you know, do an example of calculating position sizing.

I'm actually going back on it for our chance.

Yeah.

Let's say I think that there's a support here at this level.

So I want to buy this, this coin, OK, it's trading at three dollars and sixty five cents.

And I'm willing to buy here, and if it goes down, I'm going to take my loss where well, maybe I'll

take it somewhere just below the sports.

Or if I want to be even safer, you know, three dollars is here, three dollars is probably going to

be a big support because it's a very big round number.

I might want to put my stock below.

So it's really it's up to you, but you're going to decide on your entry price, which right now is

365.

OK, and then.

You know, the take profit doesn't matter for now, and then you're going to decide on your Stop-Loss.

So let's say if I think I want to take my loss, if it breaks the support level.

So at three, twenty five.

Then that's where I'm going to put it, and then my take profit might be somewhere else.

My take profits.

Might be somewhere higher, so I can't actually get that, I can't move it anymore, but yeah, then

I could put my take profit higher.

But it doesn't matter about the big profit.

Doesn't matter.

For now, the way we calculate how many how much of a position we buy is by looking at how much we can

lose.

Yeah, we want to make as much money.

But the important thing that we need to we need to manage is how much we can lose, because if we make

too much money, it's not the end of the world.

But if we lose too much money, that's the end of the world.

So in this situation, I calculated my enterprise and my exit price.

So I remember the formula.

It's going to be two hundred dollars that the amount of money that we're willing to lose divided by.

And we have our entry price, which is sixty five minus the Stop-Loss price, which in this case is

three point twenty five.

And this gives us 500 points.

And it makes sense.

Right, because if I had 500 coins and I buy them at 365 and the price starts losing.

Right, the price starts dropping.

Well, how much is it going to drop by before I think my loss, it's going to drop from three.

Sixty five to three.

Twenty five.

That's a drop of how much?

That's a drop of 40 cents.

OK, now, if I lose 40 cents times five hundred points, I'm losing, what, two hundred dollars.

So basically in this way I calculated the optimal amount of coins that I need to buy so that if the

price goes against me and it reaches my stop loss where I decided I'm out, I'm moving to my next trade,

then the maximum amount of money that I lose is two hundred, which is what I calculated is what is

going to follow the two percent rule for my account.

In that way, even if I have 10 batteries in a row like this, I'm only losing two hundred times then

two thousand, which is 20 percent of my account, which is what I calculated as the maximum amount

of money that I want to lose.

So this is how you're going to calculate your position size and this is how you're going to manage your

risk.

That way, you never lose more than you have to.

This is position sizing and we'll keep working on top of this in the next lecture.