## Position size yourself to Success

In Part 4 – What to expect…

• Position size yourself to success
• The 2 main position sizing models the professionals use
• Discovering how important stops are in determining your position size
• Understanding position size versus the initial margin required

### Position Sizing with CFDs

Your initial stop can be placed so that you limit your losses to a fixed dollar amount. There are two methods that you could use to achieve this:

1. Determine your parcel size and then set the stop at a fixed percentage below your entry.

In both cases, determine the maximum dollars you are prepared to lose. For this example, I am using \$500.

When using a fixed parcel size method, divide the dollars at risk, \$500, by the face value of the contract, say \$10,000, and multiply by 100 to obtain a percentage. Note that you should use the face value, not the margin requirement, in this calculation. The stop will need to be placed 5 per cent (500/10,000 × 100) below your entry point to reduce your risk to an acceptable level.

### In the example with Bendigo Bank (BEN):

• Your position size is \$10,000, which will buy 1,000 CFDs at \$10.00 (blue line).
• Your stop is placed at 5 per cent below your entry which is 5 per cent × \$10.00, equal to \$0.50 below the entry point. So the stop is placed at \$9.50 (red line).

If this trade was to go wrong, then the share would drop by 50¢ × 1,000 CFDs, causing a loss of \$500 plus any brokerage and slippage.

When using a fixed-risk calculation the entry point remains the same and the placement of the stop is decided on.

• A level for the stop was chosen at \$9.80 (purple line).
• Calculate the appropriate position size using the following formula: number of CFDs = capital at risk /
(entry price – exit price).

### In the BEN example:

• Stop is set at \$9.80.
• The position size is 500/(\$10.00 – \$9.80) = 2500 contracts. This gives a total face value of \$25 000. Note that you should use the face value, not the margin requirement, in this calculation.

In both examples, the risk is the same at \$500 excluding brokerage and slippage, even though using the second method, nearly twice as many contracts are bought as in the first. It is also important to understand that at no time have we considered how much margin is required to trade these amounts of money.

Gains and losses occur on the face value of the contracts held, not the margin requirement, making it important to understand how large a position you are trading. The margin requirements vary from share to share, with a \$25 000 position requiring as little as \$750 in initial margin, or even less for a CFD index position. It is not the initial margin but the variation margin that will affect your account most strongly. For more information on the variation margin and how that works please refer to day 1 of this 7 day CFD tutorial.

When entering a position always calculate your risk and size your positions accordingly.   This is an important aspect of your success in the CFD market.

Coming up next…

• The essential basics of building a sound, robust and successful CFD trading plan
• Establishing ideas around the ideal set up criteria to prepare you for your entry
• The different types of stops professional traders use
• The capital protection formula
• Knowing when to take profits systematically
• Understanding the essential part of trading success – Executing the trading plan.