Position Sizing: Fixed Percentage Model
When determining the position size we can take based on our risk parameters we need to have to establish whether we base our risk on a fixed percentage model or a fixed dollar model. This CFD Tutorial will focus on the fixed percentage model!
For the Fixed Percentage model we have to consider two ways to determine our exit price or stop loss. To pre determine a stop loss you need to decide how much you are willing to risk as a percentage, eg 2%, to the determine how many CFDs you will trade in. in this case we have determined our risk which will be 2% of our trading capital. We have also determined the stop loss now we need to find out how many CFDs we can trade to keep within these risk parameters. The equation is as follows.
For an example let’s say:
- The trader has $5000 in Capital
- They know stock XYZ has hit a recent low of $0.90 and is now trading at $1.00 so we want to use the $0.90 as our stop loss.
- They are willing to risk 2% of our capital
With this method we will notice that the full notional value of the trade then varies dependent on whether your capital grows or shrinks and it caters for these fluctuations and adjusts risk accordingly. Therefore the risk in $ terms varies each time.