{"id":146007,"date":"2019-05-15T01:54:11","date_gmt":"2019-05-14T15:54:11","guid":{"rendered":"https:\/\/www.gomarketingteam.com\/auarticles\/cfd-position-sizing\/"},"modified":"2021-04-15T08:51:32","modified_gmt":"2021-04-14T22:51:32","slug":"cfd-position-sizing","status":"publish","type":"post","link":"https:\/\/www.gomarkets.com\/en\/articles\/trading-strategies\/cfd-position-sizing\/","title":{"rendered":"Position Sizing for ASX Share CFDs ( Free calculator download )"},"content":{"rendered":"

Position sizing is simply the number of contracts that you choose to enter for any specific trade.<\/p>\n

It is this, combined with the movement in price (either positively or negatively) from entry to exit in your trade, that determines your final dollar result for any specific trade.<\/p>\n

As this result impacts on your trading capital, position sizing, along with appropriate exit decisions and actions, are THE two key factors in both risk management and taking profit.<\/p>\n

It is good trading practice to have a \u201ctolerable risk level\u201d, i.e. what you are prepared to lose on a single trade. This, as we have covered in First Steps, is usually expressed as a percentage of your total trading capital (somewhere between 1-4% are commonly used).<\/p>\n

For example, If your chosen risk level is 3% and the capital in your account is $5000, this means that you would be prepared to risk $150 on one trade.<\/p>\n

Why use formal position sizing?<\/strong><\/h3>\n

A formal position sizing system aims to answer the question \u201chow many lots do I enter to keep any loss within my tolerable risk level if my stop loss is triggered?\u201d.<\/p>\n

As we enter a trade, we ALL position size, but we have a choice as to how we action this. We can:<\/p>\n

    \n
  1. Guess.<\/li>\n
  2. Use a dollar level i.e. when it hits this we are out (you can retrospectively modify a stop level on a trade chart on your trading platform).<\/li>\n
  3. Use a technical level as a stop loss and work out how many contracts we can enter based on the Pip movement between entry and stop.<\/li>\n<\/ol>\n

    Logically, \u201c3\u201d would seem the most robust AND this should be calculated BEFORE entering a trade.<\/p>\n

    So how do I position size?<\/strong><\/h3>\n

    Accepting that the third of the options above is theoretically the optimum method, the process is:
    \na. What is my \u201ctolerable risk level\u201d in dollar terms?
    \nb. What is the desired technical entry and stop loss price levels?
    \nc. What is the dollar difference between entry and stop loss exit?
    \nd. Divide \u201da\u201d (your tolerable risk level) by \u201cc\u201d to get an estimated position size.<\/p>\n

    If your account is in Australian dollars the calculation is easier than trading either many index CFDs<\/a> (except for the ASX200) or Forex as there is no need to add a further calculation to convert a profit\/loss back into your account currency.<\/p>\n

    Other position sizing issues to consider:<\/strong><\/h3>\n