Maximize Trading Profits with Correct Position Sizing 2 
Maximize Trading Profits with Correct Position Sizing 2
by InformedTrades
Video Lecture 51 of 77
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Date Added: May 7, 2017

Lecture Description

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In today's lesson we are going to talk about another method which Dr. Van K Tharp talks about in his book Trade Your Way to Financial Freedom, the % Volatility Model for position sizing.

As we have discussed in our previous lesson on the Average True Range, Volatility is basically how much the price of a financial instrument fluctuates over a given time period. Just as the Average True Range, the indicator that was designed to represent average volatility in an instrument over a specified time, can be referenced when determining where to place your stop, it can also be used to determine how large or small a position you should trade in a given financial instrument.

To help understand how this works lets take another look at the example we used in our last lesson on the % Risk Model for position sizing, but this time determine our position size using the % Volatility Model for position sizing.

The first step in determining what your position size will be using the % Volatility Model is specifying what % of your total trading equity you will allow the volatility as represented by the ATR to represent. For this example we will say that we will allow Daily Volatility as represented by the ATR to account for a maximum of a 2% loss of trading capital.

If you remember from the example used in our last lesson we had $100,000 in trading capital and we are looking to sell crude oil which in that example was trading at $90 a barrel. After pulling up a chart of crude oil and adding the ATR you see that the current ATR for Crude is $2.55. As you may also remember from our last lesson a 1 point or 1 cent move in Crude equals $10 per contract. So with this in mind that volatility in dollars per contract for crude equals $10X255 which is $2550.

So as 2% of our trading capital that we are willing to risk on a volatility basis equals $2000 under this model we cannot put a position on in this instance and would have to pass up the trade.

As Dr. Van Tharp states in his book, the advantage of this model is that it standardizes the performance of a portfolio by volatility or in other words does not allow financial instruments with a higher volatility to have a greater affect on performance than financial instruments with a lower volatility and vice versa.

The position sizing methodology that one ultimately chooses for his strategy should be decided by testing the strategy, the methodology for which we will cover in later lessons, and seeing which method works best with that particular strategy.

Course Index

  1. Intro to Technical Analysis
  2. Introduction to Dow Theory
  3. Second 3 Tenets of Dow Theory
  4. How to Read Stock Charts
  5. How to Trade Support and Resistance
  6. Multi Time Frame Analysis
  7. Introduction to the Double Top and Double Bottom Charting Pattern
  8. How to Trade Double Tops Like a Pro
  9. How to Trade the Head and Shoulders Pattern Part 1
  10. How to Trade the Head and Shoulders Pattern Part 2
  11. How to Trade the Wedge Chart Pattern Like a Pro Part 1
  12. How to Trade the Wedge Chart Pattern Like a Pro Part 2
  13. How to Trade the Flag/Pennant Patterns Like a Pro Part 1
  14. How to Trade the Flag/Pennant Patterns Like a Pro Part 2
  15. How to Trade Triangle Chart Patterns Like a Pro Part 1
  16. How to Trade Triangle Chart Patterns Like a Pro Part 2
  17. Learn to Trade with Technical Indicators
  18. How to Trade Moving Averages Like a Pro (Part 1)
  19. How toTrade Moving Averages Like a Pro (Part 2)
  20. How to Trade the MACD Indicator Like a Pro (Part 1)
  21. MACD Indicator: Trade it Like a Pro (Part 2)
  22. How to Trade the Relative Strength Index (RSI) Like a Pro
  23. How to Trade Stochastics Like the Pro's Do
  24. The Difference Between the Fast, Slow and Full Stochastic
  25. How to Trade Bollinger Bands - Stocks, Futures, Forex
  26. How to Trade the Average Directional Index (ADX)
  27. How to Trade the Parabolic SAR
  28. How to Trade Candlestick Chart Formations Part 1
  29. How to Trade Spinning Tops and Doji Candlestick Patterns
  30. How to Trade the Bullish/Bearish Engulfing Candlesticks
  31. How to Trade the Hammer Hanging Man Candlesticks
  32. How to Trade the Morning/Evening Star Candlestick Pattern
  33. How to Trade the Inverted Hammer/Shooting Star Patterns
  34. Why Most Traders Lose Money and The Solution
  35. Why Traders Hold On to Losing Positions
  36. Two Trading Mistakes Which Will Destroy Your Account
  37. Herd Mentality is the Psychology That Leads to Big Trading Losses
  38. Profit Expectations: What Millionaire Traders Know
  39. How to Join the Minority of Traders Who Are Successful
  40. How To Determine Where to Put Your Initial Stop Loss Order
  41. How to Use the Average True Range (ATR) To Set Stops
  42. How to Up Your Chances for Profit When Setting Stops
  43. How to Reduce the Chances of Being Stopped Out on a Trade
  44. How Successful Traders Use Indicators to Place Stops
  45. Stop Your Mind From Causing You to Take Profits Too Soon
  46. How To Use Trailing Stops
  47. Why Position Sizing is So Important in Trading
  48. Why Fixed Position Sizing Is Not the Best Way to Trade
  49. Trading The Martingale and Anti Martingale Strategies
  50. How to Set Trade Position Size for Maximum Profits
  51. Maximize Trading Profits with Correct Position Sizing 2
  52. Fundamental Analysis and The US Economy
  53. A Simple Explanation of the US Economy for Traders
  54. Simple Explanation of The US Economy For Traders Part 2
  55. The Business Cycle and Fiscal Policy - What Traders Know
  56. How Interest Rates Move Markets
  57. What Traders Know About Interest Rates Part 2
  58. What Traders Need to Know About The Structure of The Fed
  59. How the Fed Changes Interest Rates
  60. How to Determine When the Fed is Going to Change Rates
  61. Why Markets Move Ahead of Interest Rate Announcements
  62. How to Trade the GDP Number (Part 1)
  63. The Components of the Gross Domestic Product (GDP)
  64. Intro to Trading Non Farm Payrolls (NFP's)
  65. Trading the News - Economic Numbers - Retail Sales
  66. Trading the News - Economic Numbers - ISM Manufacturing
  67. The Producer Price Index (PPI)
  68. The Consumer Price Index (CPI)
  69. Trade the News - Existing Home Sales Index
  70. How To Interpret the Consumer Confidence Index (CCI)
  71. How to Interpret the Index of Leading Economic Indicators
  72. The Advantages and Disadvantages of Day Trading
  73. The Advantages and Disadvantages of Swing Trading
  74. The Advantages and Disadvantages of Position Trading
  75. How to Keep a Trading Journal
  76. The Most Important Attributes of a Good Trading Journal
  77. The 20 Components of a Successful Trading Plan

Course Description

This is a series of 77 short video lessons meant to give traders an introduction to the basics of trading as well as the components necessary to develop a profitable trading plan.

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