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The Position Manager and Reward/ Risk Lines when used in combination with Prime-Line helps you calculate an optimal number of shares or contracts for new positions.
Regardless of the trading method used, a good, but simple, position management strategy is to risk no more than a specific percentage of your trading capital on every trade. Extensive testing has shown that the maximum amount a trader may lose on a single trade without damaging long-term prospects is 2 percent of account equity. This limit includes slippage and commissions.
Looking at a weekly graph of Caterpillar Inc. notice the bull trend retracement to the 38.2% Fibonacci level. Let's say the 91.90 level represents a move above Prime-Line resistance.
We drop a Price Line tool on the graph and set it's price to $91.90. We 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 the previous low pivot and Prime-Line support. Risk line represents the price level at which we liquidate the position. Risk line price is a stop-loss price. At the same time we see that Price Line shows the risk as 6.09% per share.
Let's say 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.
Lines R1, R2 on the graph are Risk-to-Reward lines. They always move to the new values as you adjust the risk line and the risk/ reward ratio in the properties window. The benefit of these lines is that they can be used with the Prime-Line structure to identify potential reward targets. Having multiple candidates for a trade and all other considerations being equal, you might want to trade the security with the greatest reward to risk ratio.
