Size does Matter

Been a while, but I want to put a piece together that gives perspective on position sizing. Some of the Tradespoon faithful have heard one of our valued webinar presentation partners, Joe Cusick from TradingBlock.com, say, “the big killer to traders, especially trend traders, is they trade too big. Size kills!” He is right, sizing a trade appropriately is critical, especially if you are a trend trader.

As a trend trader you are not trying to line up a lot of little winners, you are trying for triples and home runs. With that said you find you are winning maybe four out of ten times. In baseball you go to the hall of fame if you have those stats, but in trading you could find yourself in the poor house if you do not size your positions correctly.

As a trend trader with a four out of ten win rate you can expect a stretch of consecutive losing trades, as high as 16 to 18 trades in a row. This can cut your account almost in half with that many losses even if you are using only 4-5 percent per trade. So knowing that you could have a stretch of losses, sizing positions with only 1-1.5 percent in each trade will allow you to ride out a bad stretch a lot longer. I may also allow you to sleep better at night.

This will allow you to put on more trades. Take a page from Stats 101, the more occurrences you have the better your odds for potential success.

Have a great trading Day!