Work through each of the examples using the position sizing equations shown below. Position Size = Risk Limit / Probable Risk

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1 Work through each of the examples using the position sizing equations shown below. Position Size = Risk Limit / Probable Risk Risk Limit = (NLV Portfolio Risk) x Max Risk Probable Risk = Entry Price Stop Loss Price EXAMPLE #1 Beginning Account Balance = $5,000 Max Risk = 2% You re ready to start trading using the account information above. You see a nice setup on the chart for Company XYZ and want to place an order. Entry Price of Company XYZ shares = $22.45 Stop Loss Price = $21.10 a) Assuming this is your first trade, what is the risk limit? ü Risk Limit = (5000 0) x.02 = $100 ü Probable Risk = = $1.35 ü Pos. Size = 100 / 1.35 = = 74 shares d) How much capital is required to make this trade? ü Cap. Req. = Entry price x position size = x 74 = $1, Your order is filled and you re now long XYZ. After a couple days, the price of your XYZ shares rises to $ You now want to set up a trade for shares of Company ABC. Entry Price of Company ABC Shares = $31.20 Stop Loss Price = $28.80 a) What is the current NLV of your account? 2014 StrongForce, Inc 1

2 ü NLV = Original Cash Balance + Unrealized Gains in open positions Unrealized Losses in open positions ü NLV = (74shares x ( )) - 0 = $5, b) How much risk, in dollars, are you currently carrying in your portfolio? As a percent of your NLV? ü The initial risk that you carried on XYZ trade was $1.35 per share. That was based on your entry price of and a stop loss at However, the current price is now at and your stop loss has not moved which means you are now carrying more risk. ü Current Risk ($) = ( ) x 74 shares = $ ü Current Risk (%) = / = 3.85% c) What is the risk limit for trade #2? ü Risk Limit = ( ) x.02 = $98.00 d) What is the probable risk for trade #2? ü Probable Risk = = $2.40 e) What is the proper position size for this trade? ü Position Size = 98 / 2.40 = = 40 shares f) How much capital is required to make this trade? ü Cap Req = x 40 = $1, Your order is filled and now you have two open trades. The following day, the price of XYZ gaps up to $28.50, however, the price of ABC slides to $ You see a nice setup in the chart for Company PQR and want to place another trade. Entry Price of Company PQR Shares = $54.60 Stop Loss Price = $49.90 a) What is the current NLV of your account? ü NLV = (74 x ( )) (40 x ( )) = $5, b) How much risk, in dollars, are you currently carrying in your account? As a percentage of NLV? ü XYZ trade risk = 74 x ( ) = $ ü ABC trade risk = 40 x ( ) = $12 ü Current Risk ($) = = $ ü Current Risk (%) = / = 10.43% 2014 StrongForce, Inc 2

3 c) What is the risk limit for trade #3? ü Risk Limit = ( ) x.02 = $96.08 d) What is the probable risk for trade #3? ü Probable Risk = = $4.70 e) What is the proper position size for trade #3? ü Position Size = / 4.70 = = 20 shares f) How much capital is required to make this trade? ü Cap Req = 20 x = $1, EXAMPLE #2 Beginning Account Balance = $1,000 Max Risk = 1% FX Micro Account: 1 lot = 1,000 units Pip Value = $0.10 You re trading in the FX markets using the account information above. You re trading in a margin account and the margin requirements will vary depending on the currency pair you re trading. Based on your analysis and the rules you established in your trading plan, you see a good opportunity for a long trade in EURUSD. Margin Requirement per lot of EURUSD = $13.00 Entry Rate = Stop Loss Rate = a) Assuming this is the only open trade you have, what is your risk limit? ü Risk Limit = (1000 0) x.01 = $10 ü Probable Risk when trading fx is based on pips and pip value. ü Probable Risk = ( ) x.10 = $5 ü Position Size = 10 / 5 = 2 lots d) How much capital is required to make this trade? ü Cap Req = 2 lots x $13.00 = $26.00 Your order gets filled and you re now long EURUSD. After a few days, it has dropped 15 pips to You ve been scanning other currency pairs and see a nice setup to go long USDJPY. Margin Requirement per lot for USDJPY = $ StrongForce, Inc 3

4 Entry Rate = Stop Loss Rate = a) What is the current NLV of your account? ü NLV = 1000 ((2 x ( )) x.10) = $ b) How much risk, in dollars, are you currently carrying in your account? As a percentage of NLV? ü Current Risk ($) = 2 x ( ) x.10 = $7.00 ü Current Risk (%) = 7.00 / =.70% c) What is the risk limit for the USDJPY trade? ü Risk Limit = (997 7) x.01 = $9.90 d) What is the probable risk for the USDJPY trade? ü Probable Risk = ( ) x.10 = $1.40 e) What is the proper position size for this trade? ü Position Size = 9.90 / 1.40 = 7.07 = 7 lots f) How much capital is required to make the trade? ü Cap Req = 7 x $10 = $70.00 Your order gets filled and now you have 2 open positions. When you check your positions the next day, you see that EURUSD has rebounded to but USDJPY spiked down and triggered your stop loss, exiting you from the position. a) How much money did you lose on the USDJPY trade? ü Since the market never went in your favor and your stop loss was triggered, the loss on this trade is equal to the original probable risk multiplied by the position size. If the market had gone in your favor prior to triggering your stop loss, there would be unrealized gains to add to your loss on this trade. ü Loss ($) = 7 lots x $1.40 = $9.80 b) What is the current NLV of your account? ü NLV = ((2 x ( ) x.10) 9.80 = $ c) How much risk, in dollars, are you currently carrying in your account? As a percentage of NLV? ü EURUSD risk = 2 x ( ) x.10 = $14.20 ü USDJPY risk = 0 ü Current risk ($) = $ StrongForce, Inc 4

5 ü Current risk (%) = / = 1.43% EXAMPLE #3 Beginning Account Balance = $5,000 Max Risk = 0.5% You re ready to start trading using the account information above. You see a nice setup to take a short position on Company XYZ and want to place an order. Entry Price of Company XYZ shares = $22.45 Stop Loss Price = $23.50 a) Assuming this is your first trade, what is the risk limit? ü Risk Limit = (5000 0) x.005 = $25.00 ü Probable Risk = = $1.05 ü Position Size = 25 / 1.05 = = 23 shares EXAMPLE #4 Beginning Account Balance = $1,000 Max Risk = 1.5% FX Micro Account: 1 lot = 1,000 units Pip Value = $0.10 You re trading in the FX markets using the account information above. You re trading in a margin account and the margin requirements will vary depending on the currency pair you re trading. Based on your analysis and the rules you established in your trading plan, you see a good opportunity to short the EURUSD. Margin Requirement per lot of EURUSD = $13.00 Entry Rate = Stop Loss Rate = a) Assuming this is the only open trade you have, what is your risk limit? ü Risk Limit = (1000 0) x.015 = $ StrongForce, Inc 5

6 ü Probable Risk = ( ) x.10 = $3.00 ü Position Size = 15 / 3 = 5 lots 2014 StrongForce, Inc 6