• Skip to primary navigation
  • Skip to content
  • Skip to footer
StoneX®

Trade Futures, Spreads and Options with Confidence.

Top Navigation

  • Open a Futures Account
  • Sign Up
  • Log in
  • 1.800.800.3840

Primary Navigation Menu

  • About
    • Who We Are
    • Services
    • Risk Disclosure
    • COVID-19
  • Trade
    • Broker-Assisted
    • Self-Directed / Online
    • Request Pricing
  • Hedge
    • Ag Marketing Plan
    • WASDE Analysis
    • Grain Resources
    • Livestock / Dairy Resources
    • Request Pricing
  • Invest
    • Automated Strategies
    • Managed Futures
    • Request Pricing
  • Advisories
    • GENERAL / FUNDAMENTAL
      • DT Newsletter
      • Insider Market Advisory
      • Turner’s Take Newsletter & Podcast
    • TECHNICAL ANALYSIS
      • The Cullen Outlook
      • Data Feed Trade
      • Jarboe Trading Journal
      • Trade Spotlight
    • AG MARKETING
      • Cattleman’s Advisory
      • Technical Ag Knowledge
      • Turner’s Take Ag Marketing
    • THIRD-PARTY RESOURCES
      • CFRN
      • Moore Research Center, Inc. (MRCI)
      • OptionWorks®
      • TASMarketProfile.com
  • Education
    • CME Group Resource Center
    • CME Group Offers
    • Small Exchange Resources
    • Guides
    • Frequently Asked Questions
    • Order Entry Handbook
  • Blog
    • Futures 101
    • Ag Marketing
    • Tips & Strategies
    • Trading Advisories
  • Resources
    • Trading Software
    • Quotes and Charts
    • Futures Calendars
    • Contract Specifications
    • Margin Requirements
    • Futures Calculator
  • Accounts
    • Apply
    • Access My Account
    • Funding
  • Contact
 

How to Calculate the Optimal Position Size

May 10, 2017 by Daniels Trading| Tips & Strategies

Perhaps the most important question a trader will face is “How much risk do I assume on the next trade?” A fundamental driver of risk is position size, or the amount of a given security accumulated during the execution of a trade. Position size has several definitions, depending upon whether the financial instrument being traded is an equity, debt, derivative or currency product.

How Position Size Impacts Risk

In futures trading, position size refers to the quantity of contracts being bought or sold. As the number of contracts involved in a specific trade increases, so does the degree of financial leverage. Higher degrees of leverage boost margin requirements as well as the assumed risk of the entire transaction.

As an illustration of the relationship between position size and leverage, let’s say a trader likes the probability of an intraday rally in U.S. equities. In an attempt to capitalize upon a possible breakout, the following scenario unfolds:

  • Market entry: The trader buys 1 contract of the E-mini S&P 500 (ES) at a predetermined price
  • Position Size: Long, 1 contract
  • Margin requirements: Intraday, US$500
  • Exposure: The assumed capital risk is US$12.50 per tick

Shortly after opening the position, a release of positive economic data interjects optimism into the market. As a result, the trader decides to increase position size:

  • Market entry: The trader buys another contract of the E-mini S&P 500 (ES) at the initial, predetermined price
  • Position Size: Long, 2 contracts
  • Margin Requirements: Intraday, US$1000
  • Exposure: The assumed capital risk is US$25.00 per tick

Because the position size grew from being long 1 ES to 2 ES, the margin requirements and capital exposure per tick effectively doubled. Although actively trading a larger number of contracts may produce greater returns, it also involves the assumption of much larger risks.

Calculating Optimal Position Size

Futures markets can exhibit chaotic behavior. If a trader fails to address trade management and leverage before entering the market, errors attributable to subjectivity are likely to occur.

Three elements of futures trading are crucial in quantifying an optimal position size:

  1. Account size: The amount of risk capital available to the trader is a critical determinant of position sizing. Brokerage-specified, instrument-specific margin requirements must be met in order to take an active position in the market. In the event that they are not, open positions are liquidated, and market entry is prohibited.
  2. Risk tolerance: Often referred to as the “pain threshold,” risk tolerance refers to the portion of the trading account available to be lost on an individual trade. Commonly accepted tolerance levels range from 1 percent to 3 percent of the trading account balance.
  3. Stop loss: A stop loss is the market price in which a trade’s failure is confirmed, and profit is no longer a foreseen outcome. Stop losses are developed using many different philosophies, but in futures trading they are most commonly quantified by a predetermined number of ticks.

By calculating the portion of the trading account to be risked and how expensive the trade in question will be, you can derive your optimal position size:

Maximum Capital Risk ÷ Specific Trade Risk = Optimal Position Size

Use the following procedure to determine the optimal position size for a trade of WTI Crude Oil (valued at US$10 per tick), assuming a US$10,000 account, 3 percent risk tolerance, and 15 tick stop loss:

  1. Calculate the maximum capital risk (account size × risk tolerance):

    US$10,000 × 0.03 = US$300

  2. Calculate the specific trade’s risk (stop loss in ticks × tick value):

    15 × US$10 per tick = US$150

  3. Derive the optimal position size (maximum capital ÷ trade risk):

    US$300 ÷ US$150 = 2 contracts

According to these calculations, the proper position size for the crude oil trader is 2 contracts. Putting on a trade with more than 2 contracts is an excessive use of leverage. Likewise, a trade with fewer than 2 contracts means that the potential gains are insufficient.

Summary

Remember that position sizing is 100 percent controllable. Although the futures markets are often unstable in nature, the implementation of leverage need not be. Trading with appropriate levels of assumed risk is an integral part of avoiding catastrophic loss and achieving longevity within the marketplace.

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

Subscribe To The Blog

Footer

Site Navigation

  • Frequently Asked Questions
  • About Us
  • Customer Reviews
  • Contact Us
  • Futures Blog
  • Open a Futures Trading Account
  • Media Resources
  • Fund Your Account
  • Legal Notices

Contact Us

StoneX Financial Inc.
Daniels Trading Division
230 South LaSalle Suite 10-500
Chicago, IL 60604
+1.312.706.7600 Local / Int'l
+1.800.800.3840 Toll-Free
+1.312.706.7605 Fax

Connect with Us

Trustpilot
Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

  • Risk Disclosure
  • Privacy Policy
  • California Residents Privacy Notice
  • Terms of Use
  • Back to top