Position Manager in a combination with a Price Line tool helps you calculate an optimal number of shares or contracts for a new position. Identifying a perfect position size is a very broad and complex subject that has entire books devoted to it. Our goal here is to equip you with basic understanding of the subject and show you how our tools make a position management a snap.

First of all, everything we are going to talk about here has different names in a field of trading and investing. Some call it position management, others - money management, risk management, portfolio management, position sizing etc. Regardless of what different sources call it, position management has the only one goal - ensure your survival in the world of unpredictable price fluctuations.

Extensive testing has shown that the maximum amount a trader may lose on a single trade without damaging his long-term prospects is 2 percent of his equity. This limit includes slippage and commissions. If you have a $20,000 account, you may not risk more than $400 on any trade. Please note that this is not how much the position is going to cost you. You may invest $5,000 of your $20,000 equity, but you are only "risking" $400 of it. If you have a $100,000 account, you may not risk more than 2000$ on a trade, but if you have only $10,000 in your account, than you can risk no more than $200 on a trade.

Calculating your own position size

A good, but simple, position management strategy is to risk a percentage of your trading capital on every trade. When you enter a position in the market you need to know two things:

1. How much money do you want to risk?
2. How much do you want to risk per share?

For the first question, as we already discussed, the answer would be 2% of your equity. Answer on the second question depends on an instrument you want to trade and on the time you want to trade it, unless you follow a system that has a set risk value like 5% or 15%. The market instrument in our case is shares of Caterpillar Inc.

Looking at a weekly graph it is easy to notice that originated in July 2004 bull trend had a subsequent retracement to the 38.2% Fibonacci level and there is a possibility it will continue trending up. Let's say that this is our system and a market opportunity is identified. The price for the current week was closed at $91.90 per share and this is exactly the price we will try to enter the market the next week.

Drop a Price Line tool on a graph and set it's price to $91.90. Make sure that property UseRiskLine of the Price Line is set to True. We will set a risk line to $86.30 or $0.10 below a valley of the retracement. Risk line is nothing more but a price level at which we consider the trading opportunity to be gone and we liquidate the position. Risk line price is a stop-loss price. At the same time Price Line gave you the answer on the second question: you want to risk 6.09% per share.

Having all the necessary values identified, we are ready to utilize Position Manager.

In our example, we have a $25,000 account and we are willing to risk only 2% of its value. For a particular long position we won't allow it to go down more than 6.09% (opening price gaps may still occur). Then by providing a price per share and a transaction cost (one way), Position Manager calculates that we need to buy 89 shares (a common practice would be to go with the closest round number - 90). So by trading almost $8,200 worth of CAT shares we are risking only 2% of our equity. But for this statement to be true, you must have a stop loss in place as marked by a Risk Line.

Risk/Reward Lines

Lines R1, R2 and so on are Risk-to-Reward lines. They always move to the new values as you adjust a risk line. The benefit of these lines is that they could be used in conjunction with any of technical analysis tools to visually identify a possibility of a price reaching the biggest of Risk/Reward lines. Having multiple candidates for a trade and all other considerations being equal, you might want to open a trade for a security with the biggest potential Risk/Reward value.