Position Sizing: Learning to Lose

Position sizing is one of the components of a trading plan, and it's important to be just as disciplined and consistent with this as with all other parts of the plan. Position sizing is defining how much we will risk for each and our objective is to consistently get the most profit with the least amount of risk.

So, how much should you risk per trade? There is no one-size-fits-all answer, but to manage our risk consistently, we must establish simple, objective, and common-sense rules grounded in the realities of trading.

Let's take a look at some of those realities

• As traders, we should expect to lose more often than win and must learn how to manage
losses effectively.
• At some point, we will face drawdowns with many consecutive losses.
• Successful trading results from a series of many trades and the compounding of gains,
not just from being right on one or a few trades.

In the video, I will show a simple guideline for calculating how much to risk per trade based on your risk tolerance over a series of trades and a drawdown number. I'm going to give you a default drawdown of 30 consecutive losses.

For example, if you have a $10,000 account and don’t want to lose more than 15% ($1,500) of your account in drawdowns, you would divide $1,500 by the default drawdown of 30 stops, which would give you $50 per trade (1/2% of the account per trade). This plan allows you to lose 30 times in a row while staying within your risk tolerance. This doesn’t mean you have to risk the entire $50 per trade; consider it a maximum amount.

If you are relatively new to trading or still fine-tuning your approach, I suggest trading very small amounts. Less than 1/4% of your account balance. Choose what feels comfortable and stick to it consistently. This allows you to make many trades while learning and not damage yourself. Be deliberate and create a plan to earn the right to size. For instance, require at least a small profit after two months and comfort with your method before incrementally increasing your risk per trade. Repeat this process every two months before increasing your size again.

It's this kind of work that helps to balance your psychological mindset. You don't get that from books about trading psychology, you get it from grounded and deliberate practice.

Use my position sizing calculations as guidelines and adjust accordingly. Once it is set, be consistent in what you do.

Trade active:

Trade entered according to plan, now just follow the rest of the plan. Either get stopped at 63.16 or move profit stop when it reaches 3R.

Trade active:

Price hit 3R so now move profit stop to 1R (66.72) according to plan.

Trade active:

Price hit 4R so now move profit stop to 2R (68.50). Keep trailing by 2R until the exit at 6R (75.62).

Trade active:

Price has hit 5R, moving profit stop to 3R (70.28). If you are playing along with the 30 Planned Trades exercise, you will notice that price is close to our 6R target. It's okay to squirm around at this point wanting profits, just notice those impulses and keep following the plan you laid out. It's better to lose than to violate your plan and win.

Trade closed: target reached:

Exit at 6R according to the trade plan. On a practical note, the actual fill was a few cents below. The price printed above our 6R line which exits our trade.