Seeing Position Size Is Most Useless Thing!

Instead think in terms of risk in currency per trade

First thing first let’s understand what position size means - Position size refers to the amount of capital allocated to a single trade or investment within a portfolio. In simple words if you have 1L capital then if you invest 20K in one trade then its 20% position size.

Now let’s understand why it’s useless instead see risk per trade with an example and build upon it as we go ahead. Let’s take an example of reliance.

Considering account size is 10L, risk per trade is 0.5% of the account, that is 5K which you can see in table of ProV indicator as “cap” & “amt”. Now consider entry at a close price that is 1269.15 Rs for two different cases. In both cases we will calculate SL%, risk per share and finally position size.

Case 1: Considering Low of the day as SL

• If SL is LOD, that is 1250.05 (as shown in the left side top corner of the image 1 as “L”) then the distance between them, that is from entry and exit price in percentage is -1.50% as shown in calculation below. This is exactly what is shown in the ProV indicator table as “D”.

• let’s calculate risk per share for SL as LOD based on entry & exit that is 1269.15 - 1250.05 = 19.1.

• If my risk per trade is 5K then I can buy (Risk Per Trade /Risk Per Share) that is 5000/19.1 = 261.78 rounding to the nearest number that is 261 shares. And as we know in India, we can’t buy shares in fractions, so it’s rounded off and this same thing is shown in ProV as “Q”.

• Calculate the investment amount for SL as LOD that is No. of shares * entry price which is 261 * 1269.15 = 331248.15 Rs.

• Finally, position size for SL as LOD is its invested amount / total capital that is 331248.15 / 1000000 = 33.12%.

Case 2: Considering Half of the day as SL

• For half of day SL, I consider the open and entry price (as shown in the left side top corner of the image 1 above as “O” & “C”) for calculation which is 1251.85 and 1269.15. Hence half means (open + close)/2 that is (1251.85+1269.15)/2 = 1260.5 Rs.

• If half of the day is 1260.5 then the distance between the entry and exit price in percentage is -0.68% as shown in calculation below. This is exactly what is shown in the ProV indicator table as “DH”.

  

• let’s calculate risk per share for SL as LOD based on entry & exit that is 1269.15 - 1260.50 = 8.65.

• If my risk per trade is 5K then I can buy (Risk Per Trade /Risk Per Share) that is 5000/8.65 = 578.03 rounding to the nearest number that is 578 shares. And this same thing is shown in ProV as “QH”.

• Calculate the investment amount that is No. of shares * entry price which is 578 * 1269.15 = 733568.7 Rs.

• Finally, position size for SL as HOD is its invested amount / total capital that is 733568.7 / 1000000 = 73.35%.

Same thing is shown in my indicator as “P” for position size when you consider LOD as SL and “PH” for position size when you consider HOD as SL as shown in the below image (To see this, you have to enable the show position sizes option in settings). Similarly, “E” and “EH” stands for enhanced quantity and “SQ” stands for standard SL for 1%, 1.5% & 2% from close. To read more about this indicator in much more detail visit here.

Now by simply comparing both and observing closely of different positions sizes, keeping capital, risk per trade entry same and based on varying SL% as shown in both the cases earlier, the position size number increases or decreases based on the SL% that which in turn means the position size is and should be a function of your entry and exit? Can we say that? If your answer is YES, then good job if not leave trading for your own good.

Now tell me if you say or trade like I will buy X stock with 20% size with 3% SL once or 20% size with 4% SL is it logical? And also, always sizing 20% for all kinds of SL% that is 1.5%, 2%, 3%, Is this logical? Absolutely Not, right? If you compare its INR risk, it won’t be the same, and it can’t be the same. And if you're doing this, don’t you think sometimes, you're oversize and undersize because you are not considering your entry and exit. And because of this your overall risk management is screwed. Think about it, for example sometimes your risk will be 1000 Rs or sometimes it will be like 1050 Rs or something like that.

What I am trying to say is if you compare risk in terms of INR it will be different and not at all consistent and if you're just deciding quantity how much to buy just by considering position size and punching orders then it's wrong.

So, can we conclude instead of seeing position size and deciding quantity it’s just better to consider risk in terms of INR of overall capital and decide quantity and now do you think the position size, does it really matter be it 20% or 50% as long as risk in INR is in control? Answer is no right. Hence position size is useless, the only thing matters is if SL is hit how much you will lose in terms of INR.

Now that you know position size is useless and when you come across people flexing about their position size like 40%, 50% & 60% in one trade etc in social media what should you do? Just unfollow them for your own good. For example, one trade they might take with 1K risk of capital, SL 2% and its position size will be 25% whereas in the next trade they keep 1K risk of capital, SL 1% and its position size will be 50%. Again, if you see INR terms it's clear the risk is the same, but you are brainwashed to see position size and which is misleading.

And few might argue, I see position size to counter gap downs or say I will know how much I am invested etc, this will be covered in future as second part of this blog.

Summary,

• Never decide quantity how much to buy based on position size instead do it based on INR risk so that your overall risk management is consistent.

• As the SL% decreases automatically the position size increases and vice versa is true that in turn means it is a function of your entry and exit.

• Calculating how much quantity to buy considering INR risk is much easier and simpler to do instead of doing or thinking in terms of position size percentage.

• Knowing risk in terms of INR if SL is hit is much better than just knowing your position size and SL.

• Completely stop thinking in terms of position size and just start thinking risk in INR it gives much more mind clarity.

• The guys who flex about their position size in social media just unfollow them.

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