Simpler’s traders continually improve and develop strategies and indicators to maximize potential for winning trades.

One part of this continual reshaping of means and methods is a skill that can benefit active traders –  position sizing.

(Check out the free video, above, for insight into trading this changing market.)

Position sizing targets potential trades

Position sizing is a guide that enables traders to stay disciplined. Trading rules – such as position sizing – can prevent high emotions from taking over when traders are faced with an unsuccessful setup.

Simpler’s traders establish a set percentage of their total trading account to use on a single trade. This position sizing helps limit risk.

Establishing discipline with position sizing while using well-researched setups is needed for all traders. Still, trading is risky. There will be wins and losses that traders don’t expect.

Scaling trades using position sizing is a way to protect capital. The goal is that one bad trade won’t wipe out an entire account.

When the setup looks decent and the technical signals are on cue, Simpler’s traders may limit their risk to 3-5 percent of their trading account. The amount risked is based on how strong the signals are that the trade may move in their favor.

A process to help with this strategy is establishing ratings for trading setups. Understanding what impacts this rating system allows traders to better understand trading position size limits and how much to allocate for each trade.

In a nutshell, the better the setup the higher the allocation of the account size – within pre-established limits.

Rating a trade with position sizing

John Carter, founder of Simpler Trading, carried out this position sizing trading rule during a setup in Google – leaving him eventually closing a $5 million trade with options on the stock. This was the largest trade of his career and followed a $1 million trade in Google a few weeks earlier.

Understanding that the signals were strong and the technicals backed up his trade, John allocated an even higher percentage of his account, as much as 20%, on this single trade. Keep in mind, he calculated this added risk based on his experience and account size.

(Check out the video, above, for insight into managing risk.)

This is where sticking to trading rules comes into play. John knew his trading account came from funds that were set aside just for trading – he was willing to lose the full amount of this trade. A 20% risk could be a serious blow to other traders.

Put this another way, this was not the account John needed to pay his monthly bills. Also, his years of experience gave him the insight necessary to quickly identify a strong setup – and the result boosted his bottom line.

Watch indexes for position sizing signals

A key component of rating a trade setup includes comparing stock price movement to the index in which it is heavily weighted. If the stock is working well with the index, it can indicate powerful moves that merit a higher allocation of the account size.

John’s entrance in the Google setup wasn’t anything “phenomenal.” He saw a setup that was working and stayed with it as long as the stacked moving averages and technical signals kept holding.

When traders include a rating system for setups into their trading plans, the ability to rationalize a trade rather than let their emotions get involved allows them to apply logic to strategy.

If a setup has a lousy rating, why take it?

Traders may include a limit of how high the setup should rate before taking a trade. This helps limit risk – nothing is at risk when there is no trade – and this can increase the probability for more winning trades.