Proper position size and money management are probably the most ignored but most important aspects of successful trading. Many experts make suggestions as to what percentage of your capital you should risk on any given trade, but calculating position size on each trade is a totally different story.

Here at Trade Like Mike, we have developed a formula to calculate the proper position size (regardless of account size) based on the volatility of the stock being traded. For example, UPP (US Dollar) may be trading at $22.00 but only moves a few cents on any given day and may only require a 40 to 50 cent move to trigger a reversal signal in the trend. The number of shares you would hold in this position, in order to expose your trading account to the same risk, would be far greater than the number of shares you would hold of DIG (Oil and Gas) that is trading at $55.00 and moves several dollars every day and may take a 4 to 5 dollar move to trigger a reversal in trend.

But don’t worry! You won’t have to crunch the numbers to determine these amounts on your own. The percentage recommendation as well as the implied volatility to properly formulate position size is built into each trade recommendation for easy application.

For example, an entry is triggered for UUP (US Dollar). Your email would include the following:  Buy UUP@22.00 IV (Implied Volatility) .50.  Therefore, if your account size was $10,000.00 and you were risking 1% or $100.00 per trade on each position – the calculation would be $100.00 ÷ .50 = 200 shares and require $4,400.00 to enter the position.

If the recommendation were: Sell short DIG (Oil and Gas) @55.00  IV (Implied Volatility) 4.00 – The calculation would be $100.00 ÷ 4.00 = 25 shares at a cost of $1,375.00. As you can see, the higher the volatility, the less you should have exposed to the trade at any given time. Therefore, even though the amounts invested as well as the number of shares differ greatly the risk factor is virtually identical because it is based on the individual volatility of each position at the time it is taken.

In my opinion, using volatility to calculate position size offers the greatest degree of protection for your assets by limiting your exposure to high volatility trades while providing confidence for proper position size in lower volatility positions.

Stops are provided on all trade recommendations as well as contingent reverse orders. This allows the trader to be nimble and ready for any sudden change in market action allowing you to stay ahead of the curve. All you need to do is check your daily position update each afternoon and make any necessary changes to your account for the next trading session so you will be ready for the next day’s action.

Smart traders understand that only 1-2% of total trading capital is ever risked on any given trade and money is taken from the market in small amounts over time.  This is why at Trade Like Mike downside protection and capital preservation are built into the system. If you are only risking 1-2% of total trading capital per trade, and this was recalculated based on the adjusted account size, this strategy alone would be enough to preserve your capital when the markets move against you, keeping you in the game. However, in addition to the application of this strategy, diversifying that same 1-2% risk over six different independently-trending markets offers additional layers of protection because it decreases the probability that a large negative move in any one market will have a significant impact on your overall position - all your eggs are in six different baskets.

This money management strategy will also automatically increase your position size on each trade, by a proper proportion as the markets move for you and your account grows. My recommendation is to only risk 1% of total trading capital per trade and only increase after you are comfortable with the system and have increased your initial capital. This is sound money management.