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Thread: Want position-size eqn: X trading balance, Y% max loss per trade, Z% stop loss

  1. #1

    Want position-size eqn: X trading balance, Y% max loss per trade, Z% stop loss

    If X is my trading balance, Y% is max loss per trade and Z% is stop loss.


    For Example:


    X = $1000 trading balance


    Y= max loss per trade at 0.6% of trading balance


    Z = stop loss at -8% from entry point


    What would be the formula to calculate a position size of a single trade based on those variables? Thanks!

  2. #2
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    Hey there, Trader. Please note that we are not a free consulting service. Will you cut us in on your earnings if we help you figure it out?

    We're really here to help math students. If you act like one, showing your work and asking insightful questions, we are more likely to respond in a helpful fashion.
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  3. #3
    Quote Originally Posted by tkhunny View Post
    Hey there, Trader. Please note that we are not a free consulting service.
    Why are being so rude. The forum is literally titled 'free math help!' If you don't feel like its fine. Have a good day dude

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    Elite Member mmm4444bot's Avatar
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    Quote Originally Posted by trader90 View Post
    Why are being so rude. The forum is literally titled 'free math help!'
    Please excuse tkhunny; he doesn't always realize when he comes across as somewhat coarse. I believe what he actually means is that he is not a consulting service.

    Although our main focus is helping students who need help with their homework, you are most welcome to post your math-related questions here. However, this is a tutoring forum. The site is run by volunteers. We have forum guidelines. Please read them.

    As nice people devote a significant percentage of their personal time volunteering here, members requesting help need to first explain what they already understand about the math question at hand. They need to show us any attempts that have already been started. And it really helps to know exactly why they're stuck.

    You may wait a few hours or a few days or months, before a volunteer tutor or other member of the forum takes an interest in your situation and replies. Don't expect a fully-worked solution or a typed presentation of any classroom concepts needed to solve your problem (however, we do often provide links to written lessons or lecture videos). These are some of the differences between tutoring, teaching, and answer mills.

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    Thanks for your understanding and cooperation. Welcome to the boards.
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  5. #5
    Quote Originally Posted by mmm4444bot View Post

    Yes, we offer math help for free, but it is the volunteer tutors and other members who get to decide what form that help takes.

    Thanks for your understanding and cooperation. Welcome to the boards.
    Hey dude thanks for explaining things out. I'm just a basement boy paper trading at the moment. Math use to be my favorite subject at school but over time I guess my skills have diminished. For some reason I don't know why I can't create this simple equation with three variable. If I remove either one, I could formulate it but piling on three seem to freeze my brain.

    I'll walk you through some definitions before moving ahead.

    - Position Sizing: It is the amount of money that one would invest into a single trade.

    - Trading Account: It is the total amount of money deposited with a financial institution or broker for the purpose of trading.

    - Maximum Loss Per Trade: It is the maximum amount of money that one would lose on a single trade with respect to their trading account.

    - Stop Loss: It is an order which would get triggered automatically, once the stock/currency reaches a certain price.

    1) Trading account is like our bank balance.
    2) Maximum loss on a single trade would either be 0.6%, 0.8% or on an extreme case 2% of the trading account.
    3) Stop Loss is tricky as it can vary anywhere between 2% to 20% based on how volatile the market is.

    I want to figure out how much money I need to place into a single trade having known my trading account (X), max loss per trade (Y%) and stop loss (Z%).

    Here is what I've got so far.

    * Trading account (X)/ Max loss per trade (Y%) = Total number of losing trading.

    eg: trading account of $1000/ Max loss per trade (0.6%), is $1000/$6 = 166.67 or ~ 167 total number of losing trader to blow up my account.

    * 100%/Stop loss Z% = 'A' where A is the times of my position size.

    eg 100%/8% = 12.5 x Stop loss amount will be my position size.

    Position size = ?

    Thanks again for taking the time and effort for replying back to me. Do let me know on this thread or PM how I could contribute back to you or this forum in any small way. Cheers

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    Quote Originally Posted by trader90 View Post
    If X is my trading balance, Y% is max loss per trade and Z% is stop loss.


    For Example:


    X = $1000 trading balance


    Y= max loss per trade at 0.6% of trading balance


    Z = stop loss at -8% from entry point


    What would be the formula to calculate a position size of a single trade based on those variables? Thanks!
    It would help people a lot who aren't familiar with stock trading if you would define these terms. What is stop loss? What is a position size? This all seems like jargon. I know how to calculate percentages and many other quite complex things, but I don't know what you are talking about or trying to do.

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    Elite Member mmm4444bot's Avatar
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    Quote Originally Posted by j-astron View Post
    It would help people a lot who aren't familiar with stock trading if you would define these terms.
    Hi j-astron. I just approved trader90's latest post, in which he provides the definitions. You were not able to see them, when you posted. He has three approved posts now, so his future posts will not be moderated by the system.
    "English is the most ambiguous language in the world." ~ Yours Truly, 1969

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    Thanks for letting me know mmm4444bot.

    Anyway, I looked into this a little bit more, because I was still not clear on the terms, even after reading the OP's definitions. I came to the conclusion that day trading has a lot of silly jargon, but I think I at least understand what is going on now.

    Your position size is how many units of a given stock (or currency) you can buy given the amount of your trading account that you're willing to risk in losses.

    Your stop loss is the price below which your units (shares) have to drop in order to trigger an automatic sell.

    From what I read, there are two forms of risk you have to quantify: account risk, which is what percent of your total trading account balance you're willing to risk on a stock (most sites recommend no more than 1%, it sounds like in this case you're going with 0.6%). The second is trade risk, which is what amount you're willing to lose per share (or per unit of whatever commodity you're buying). Trade risk is determined by the stop loss and the share price.

    So clearly you also need to know the share price in order to figure out your ideal position size for a given stock. This is the key piece of information that's missing. Let's call the share price P.

    So I can get you started. You say you're only willing to lose a total of 0.6% of your $1000 trading balance, or $6, on a stock.

    Let's say you buy the shares at an entry price of $P per share, and let's say the worst case scenario occurs. The price of this stock plummets. Your shares are sold automatically when the price drops 8% below the entry point. Therefore, on every share (i.e. "per trade"), you lose 8% of P, which is P*8/100 = 0.08*P.

    Let's say you bought N units of the stock (N, the number of shares, is your position size). So the total amount of money you spent was N*P, and therefore the total amount of money you lost in this scenario was N*0.08*P.

    We're imposing that the total loss, N*0.08*P, is no more than $6. Therefore, in the worst case:

    N*0.08*P = $6

    N*P = $6/0.08 = $75

    So the maximum amount of money you can spend on a stock is given by N*P = $75, since you're not willing to lose more than 8% of that (which is $6). Obviously how many shares (N) you get for that $75 will depend on the share price (P).
    Last edited by j-astron; 01-25-2018 at 11:15 PM.

  9. #9
    Quote Originally Posted by j-astron View Post
    Thanks for letting me know mmm4444bot.

    Anyway, I looked into this a little bit more, because I was still not clear on the terms, even after reading the OP's definitions. I came to the conclusion that day trading has a lot of silly jargon, but I think I at least understand what is going on now.

    From what I read, there are two forms of risk you have to quantify: account risk, which is what percent of your total trading account balance you're willing to risk on a stock (most sites recommend no more than 1%, it sounds like in this case you're going with 0.6%). The second is trade risk, which is what amount you're willing to lose per share (or per unit of whatever commodity you're buying). Trade risk is determined by the stop loss and the share price.

    So clearly you also need to know the share price in order to figure out your ideal position size for a given stock. This is the key piece of information that's missing. Let's call the share price P.


    So the maximum amount of money you can spend on a stock is given by N*P = $75, since you're not willing to lose more than 8% of that (which is $6). Obviously how many shares (N) you get for that $75 will depend on the share price (P).
    Hey thanks man for taking the time to post this out. The testnet site I'm using to paper trade lets me enter my position size andauto buys the number of shares.

    For now I've been using this (http://stockbee.biz/position-size-calculator/) online calculator to determine my position size. I'm trying to figure out if Entry Price (C) & Stop Price(D) could be substituted to % Change because as long as the change of % (aka Stop Loss %) is constant irrespective of the entry or stop price, the total investment displayed will be the same.

    I put in those same figures and got in $75 with difference entry and stop prices (keeping 8% stop loss as constant). I'll take time again to read your post again and see how you derived $75 by only knowing the Total Capital Amount (A), % of Capital to be Risked (B) & % of Stop Loss from the point of entry. Thanks again. I appreciate your effort.

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    Quote Originally Posted by trader90 View Post
    Hey thanks man for taking the time to post this out. The testnet site I'm using to paper trade lets me enter my position size andauto buys the number of shares.

    For now I've been using this (http://stockbee.biz/position-size-calculator/) online calculator to determine my position size. I'm trying to figure out if Entry Price (C) & Stop Price(D) could be substituted to % Change because as long as the change of % (aka Stop Loss %) is constant irrespective of the entry or stop price, the total investment displayed will be the same.
    You're very welcome, and good luck with the investing. It was a nice chance for me to learn something useful in the real world, as most of the math I use has applications in science, rather than business (obviously there is significant crossover there).

    The percent change is given by

    100*(entry price - exit price)/(entry price)

    or, in the notation of that calculator: 100*(C-D)/C

    So you're right that C and D or percent change are equivalent ways of specifying the stop loss, and will result in the same answer for total investment.

    However, different values for C and D obviously will result in a different number of shares that you will be able to buy.

    E.g. if the entry share price is $100 and the exit share price is $92 (an 8% stop loss), you will only be able to buy 0.75 (3/4) of a single share, since your investment cannot exceed $75 in this case.

    In contrast, if the entry price is only $10, and you specify a exit share price of $9.20 (still an 8% stop loss), you will be able to buy 7.5 shares with your $75 total investment.

    Hope this clears things up.

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