I often liken trading to running a company or doing business, where position management in trading is akin to financial management in a company. Even if your trading skills are exceptional, poor position management can still lead to losses or even a margin call, just as a company with a great business model can fail if its financial management is inadequate, potentially leading to a cash flow crisis and bankruptcy.

Therefore, position management is crucial. Today, I will discuss two of the most mainstream and simplest methods of position management that you can choose to use based on your trading system.

Method 1: Fixed Lot Size

This is a very simple and effective method of position management, which, as the name suggests, involves using the same position size for every trade. For example, you might open a position of 1, 3, or 5 lots each time.

Traders often experience losses that are larger than their gains in real-world trading. Many times, we can identify trends accurately but fail to execute well, which is largely related to the inconsistent use of position sizes. If you use positions randomly based on feelings, it's easy to be carried away by market fluctuations. For instance, after a loss, you might be eager to recoup and can't help but increase your position size, leading to severe losses. Then, when you're too cautious to go heavy after a significant loss, you end up with light positions in profitable markets and heavy positions in losing markets. This emotional rollercoaster of losses can lead to a vicious cycle.

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Another scenario is that many people, fearing losses, use too light a position size. As a result, when they take the wrong direction, they don't take the light position seriously and fail to set a stop loss, ultimately getting deeply entangled and losing a lot of money on small orders.

In both of these situations, it's difficult to make money from trading. Therefore, a reasonable fixed position size is much stronger than using random positions.

Method 2: Position Sizing Based on Stop Loss

Position sizing based on stop loss means adjusting the position size for each trade according to the size of the stop loss. This method of position management typically uses a fixed stop loss amount for each trade. Since the stop loss space varies for each order, you calculate the position size by dividing the fixed stop loss amount by the stop loss space.For example, if the amount for each stop loss is 1000 yuan, and the stop loss space is 200 points, then opening a position would be (1000 ÷ 200) = 5 contracts. If the stop loss space is 500 points, then opening a position would be (1000 ÷ 500) = 2 contracts.

This method of position management varies the stop loss space each time, but keeps the stop loss amount the same, which is more suitable for trading strategies that use a fixed profit-to-loss ratio. For instance, with a 2:1 profit-to-loss ratio, the profit-taking space is twice the stop loss space, so the profit-taking amount is also twice the stop loss amount.

These two methods are the most common schemes for position management, and everyone can choose a suitable plan based on the details of their own trading system.

There are two very important points in setting the rules for position management:

(1) The rules for position management should be combined with the drawdown data of the trading system to ensure that there is no margin call.

When establishing a trading system, it is necessary to review a large amount of historical data and conduct statistical analysis. One crucial aspect is to compile the drawdown data of the trading system, including the time period and frequency of drawdowns, as well as the amount of drawdown. The rules for position management should be set based on this drawdown data.

For example, if a fixed 1 contract is used for each opening during a drawdown period that results in a maximum drawdown of 30%, then in practice, we should set the standard for position management such that the opening should not exceed 3 contracts each time, otherwise, there is a risk of a margin call during the drawdown period. After a margin call, everything is lost, and even the best strategy is useless.

This is a very simple math problem, and I believe everyone can understand it.

(2) The standard for position management should not only prevent a margin call but also avoid severe losses.

Is it true that as long as the position management standard ensures that the account does not face a margin call, one can trade with heavy positions at will? Of course not.Bursting is the most severe risk line, but there is also an invisible risk line, which is the psychological defense line of us traders. During the loss stage, it is very easy to have psychological issues. The more severe the loss, the more serious the trading psychological issues, and the more erroneous trading behaviors are caused, such as not trading according to the system, not stopping losses, not being able to hold positions, going red-eyed and going heavy, and so on. Therefore, when we set the standards for position management, we need to consider our own psychological endurance. Where does the drawdown line make us explode in mentality? Just like testing your drinking capacity, don't get drunk, keep in a slightly drunk state, strictly guard your psychological defense line, and you won't collapse emotionally in trading, leading to a complete collapse of trading. Here, it is still emphasized that many people will overestimate their own psychological endurance. Most people think they can bear 100%, but in fact, they can only bear 30%. On the "psychological defense line" you think, give a 30-50% discount, and you can find a relatively comfortable position for yourself. You can try it. In addition, the position is better to be lighter, not heavy. A lighter position earns less, but can survive. If it is too heavy and can't bear it, the trade may be dead, and it is powerless to turn the tide when it is dead.