What is 2-tier Position Sizing?

What is 2-tier Position Sizing?

 

Only the best traders are principled enough to:

  • have a plan before entering a trade,
  • get out of a trade when their rules tell them to even though every fiber of their body tells them to stay in and
  • have a money-management regimen that will allocate a certain percentage of their account to any one trade.

The most rudimentary way to do this is with an absolute percentage to each – for example, 4 positions, 25% per position. But what if there was a better way that would ramp up our returns but not the risk? The answer is 2-tier position sizing.

2-tier Position Sizing is taking the last principle and quantifying how to assign a percentage to each trade.

 

What 2-tier position sizing does is assign a large position factor to a certain number of positions. Lets explain this with an example.

Let’s allocate 10 positions to a portfolio, 4 large positions, then assign a 1.4% to the large position factor. 2-tier will assign ([100/10] * 1.4 * 4) = 56% of your account to the top 4 positions and 44% to the bottom 6 positions instead of 10% to each position.

U.S. Government Required Disclaimer - Forex, futures, stock, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using the Trading Concepts methodology or system or the information in this letter will generate profits or ensure freedom from losses.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

© Trading Concepts, Inc. 1994-2016. All rights reserved.