In your day trading, your position or trade size is way more important than your strategy to entry or exit the trade. Having too big or too small trading size will ruin your trade, even when you have the best trading strategy.
Your position size will directly affect the pace of you to evaporate or improve your trading account quickly. Your position size comes from the number of shares you take on a single trade with the broken down risk, trade risk and account risk.
The perfect mixture of those elements will give you the perfect position size to day trade stock regardless of the market conditions.
Setting the Account Risk Limit on Each Trade
Setting the account risk is the most important step in getting the perfect position size to day trade stock. First of all, you need to set the dollar risk limit you are willing to risk on each of your trade.
Commonly, professional traders will risk 1% or less in their accounts. For instance, if your trading account has $45,000, then you can risk $450 (the 1% of your trading account). But, if you want to risk only 0.5%, then you risk $225.
Other than that, you can also use a fixed dollar amount. IF you use this, ideally, you need to use it below 1% of your total capital in your trading account.
This account risk will remain the same, regardless of other variables of trade that change. Normally, you should never risk 5% on a single trade, then 1% on the next trade, and 3% on the other trade. But, if you use a 1% risk limit per trade, then you have to risk about 1% in all of your trades.
Deciding the ‘Cents at Risk’ on Your Trade
Cent at risk refers to your trade risk. It is determined by your entry point and the place of your stop-loss order differences.
Each trade can be different according to the market volatility or your trading strategy. Sometimes, a trade can have a 5 cent risk, meanwhile, another trade has 50 cents of risk.
Every time you trade, you have to pay close attention to your entry point and stop loss location. Make your stop-loss position close to your entry point, but not so close.
Determining the Position Size for Your Trade
To determine the perfect position size to day trade stocks you need to use this formula.
Position Size = Money at Risk / Cents at Risk
For instance, if you have $45,000 in your trading account and risk 1%, then your risk is up to 4450. If you plan to buy a stock from a BCB company at $50.10, put your stop loss at $49.99 and put the risk at $0.11.
Then your position size is 4090 (from $490 / $0.11).