Plenty of questions have been passed around recently about position sizing and money management. If you ever hear me use the words "play defensively" this is what I am referring to. Properly sizing your bets and how you manage your money is the key ingredient to being a successful trader. Allow me to elaborate.
Successful trading is not always winning or losing. It is how you distribute your capital, withstand emotional decision making (psychology), and staying disciplined to your rules and financial goals. Money management is a defensive concept and keeps you alive to trade another day. Lets go over a few of the specifics in order to effectively plan your betting (position) size. Keep in mind if your ideas here are to be told exactly what YOU should do, close this window now. As usual, I try to promote original thought, and the reasons behind concepts, but since you and I are different people, what works well for one of us, might not be in the best interest of another (disclaimer).
Risk
Risk is the likelihood of a loss. At the moment we take a trade we are at risk of a loss. Positions are constantly fluctuating in value and there are many variables that influence risk. In order to account for this risk you have to consider these variables. Assuming we are talking about options... stock conditions, news, fundamental conditions, volatility, and time. Having done this research you need to quantify a likely risk (how much the stock could move) and a comfortable level of risk (what you are comfortable losing on this trade). Not just with the individual trade but as a portfolio as well (stop & bet size).
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