Position Sizing

Position Sizing is one of the most important aspects of trading

The EdgeTrades System uses fixed fractional position sizing with a maximum of two trades open at a time.  When your account grows you automatically add money to the EdgeTrades positions.  When your account shrinks, you automatically use less money for your EdgeTrades positions.  

Position Sizing FAQs

Q. Should I trade all of my money?

A. No. You should allocate your investment funds across 3 or 4 different approaches/strategies.  Diversification is an important part of risk management. You will want to allocate only a portion of your investment account to the EdgeTrades strategy.   For example, let's say you want to allocate 20% of your account to the EdgeTrades Strategy. We'll  call this your EdgeTrade Funds (EF). So,  if you have $100k in investment funds, you would allocate $20,000 for EdgeTrades.  It is entirely up to you.

Q. How many different stocks will I be trading?

A. Our system trade a maximum of two stocks at a time and only selects stocks in the S&P 500.  At any given time, you will have anywhere from zero to two different positions. 

Q. How many shares should I buy?

A. You are not really trading shares, you are trading dollars.  The position sizing algorithm will tell you how many shares of any given stock you should buy based on your account size and the price of the stock.   That is, for a $10,000 trade, you would buy 1000 shares of a $10 stock or 100 shares of a $100 stock.
Q. How much money should I use per trade?

A. The EdgeTrades System works best using Fixed Fractional Position Sizing.  This is how it works: 
 PositionSize = EdgeTrades Funds divided by 2   

Here is a detailed example: 

  1. Suppose you have $80,000 in investment funds.
  2. You decide to allocate 25% of your funds to the EdgeTrades System.  
  3. Your EdgeTrades Funds (EF) = $20,000.
  4. For each stock traded you would use 1/2 of your EF.
  5. For the first trade, each stock identified would use EF/2  = $20,000/2  =  $10,000.
  6. If only one stock buy is signaled, you still use EF/2.  The remainder stays in cash.
  7. Keep a running total of your EF using the spreadsheet provided.
  8. As your EdgeTrades Fund (EF) grows or shrinks, continue to divide your EF by 2.
  • If after three trades your EF = $20,500.  Your PositionSize will be 20,500/2 = $10,250.
  • If after three trades your EF = $19,500.   Your PositionSize will be 19,500/2 = $9750.
This position sizing algorithm is very important.  It is one of the keys to making outstanding returns while keeping the risk under control.  When the system is working well, the position size grows.  When the system is not working well, it automatically reduces your position size,  thereby taking less risk per trade. 

Key Points To Remember:

  1. Allocate your investment funds across multiple strategies.  Your EdgeTrades funds should only be a portion of your overall portfolio.
  2. At any time you will have 0, 1,or 2 stocks in your EdgeTrades Account.
  3. Each stock will use a maximum of 1/2 of your EdgeTrades funds.
  4. Never put all your money on one stock.
  5. Your position size will grow or shrink, depending on how well the system is working in that market environment.
  6. You are not buying a fixed number of shares, you are investing a specific amount of dollars which needs to be converted to number of shares. Many brokerage platforms provide a software feature to do this, or you can simply use a calculator.