Forex Position Sizing
It ain’t the size of the fight in the trade, it’s the size of the trade in the fight
Position Size. Some traders have labeled position size or position sizing a crucial part of profitability using any strategy. You could have the world’s best strategy but if you bet too big, it wouldn’t matter because at some point you would incur a string of losses that wipe you out so you’ve got to find the sweet spot.
Position size is a key aspect of risk management. The door to profits and freedom, to sail the seven seas, does not open without this key. New traders tend to come into trading with the thought that there will be one trade that puts them on the map or that every trade will be green.
Okay… So the first one is unlikely but the second is impossible. If some of these just decided to pace themselves, they would find making money a little easier. That’s what position sizing is all about, pacing your trading account and making sure you still have the capital to trade with at the end of the day.
If you wanted to start a career in juggling, would you start by juggling knives? I didn’t think so. Yet, so many new traders are trying to put on big size early on. I’ve personally done this and it went good for some time and then when I started catching L’s (because I was bound to).
I wasn’t prepared for it. I had poor risk management and it showed when the drawdowns came. You have to realize within yourself if you are trading for excitement or for money. I realized that although betting big all the time was exciting, it wasn’t profitable.
If you put on a trade and can’t sleep, you’re doing it wrong. George Soros said “Good Investing is boring. If investing is exciting for you, you’re probably not making any money”.
Know yourself and your personality. Some traders are more risk-averse and some are natural risk-takers. Don’t fight your personality because it will show up in your results. Also having a family and responsibilities should definitely affect your risk. Don’t bet the college fund on black.
It’s nice to think there’s no such thing as too small but let’s get real jimmy, we came to eat. Trading too small almost guarantees you won’t go broke, but equally guarantees you won’t make a lot of money (which is subjective of course).
You’re starting to get the picture? If not, you are probably wondering “I can’t bet too big but I also shouldn’t bet too small??” and you would be correct. You have to start small sure, but then push the throttle once you start getting good at this. You’ve gotta find…
The Sweet Spot
The sweet spot is as subjective as your views on politics. It’s whatever is right FOR YOU. It takes some experimentation but there are some guidelines to adhere to:
- Don’t risk so much that a drawdown will get your emotions riled up. A drawdown should give you a fever
- Risk enough that trading is worth it. Banks give you an interest rate per annum on savings. That’s your first target. BE BETTER THAN THE BANKS 😉
- Adjust according to your personality. If trading small stalls your engine then trade a bit bigger but not with an amount of money that will affect your standard of living if lost. And if big Percentages scare you, trade bigger capital.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.