How to Manage Position Size Effectively: A Three-Step Guide to Day Trading
The Importance of Position Management: 90% of people go bankrupt because they do not know how to manage their positions. Before entering a trade, it is essential to consider the potential profits, losses, and principal. How much you can earn depends on how much you are willing to lose; beginners should not have unrealistic profit expectations. The original calculation method for determining position size based on loss: Taking a short position as an example, if the stop loss is 1% and the take profit is 1.5%, the risk-reward ratio is 1:1.5. Assuming the maximum acceptable loss is $100, according to the formula principal = loss amount ÷ stop loss percentage, the principal can be calculated as 100 ÷ 1% = $10,000. If profitable, profit = principal × price change percentage, that is, $10,000 × 1.5% = $150. Leverage Strategies: Leverage can magnify the principal; for example, with 20x leverage, only $500 margin is needed, and with 10x leverage, $1,000 is required. However, when choosing high leverage, losses may lead to bankruptcy; for instance, if you invest $100 with 100x leverage, losing $100 would result in a total loss; if you invest $50 with 200x leverage, a 0.5% price increase would lead to bankruptcy. Advantages and Disadvantages of Fixed Amount Losses: Advantages: Quick recovery of capital, easy calculations, and minimal impact on mindset. Disadvantages: Continuous losses can significantly deplete the principal.
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