You make a great trade, but then lament that your trading position was too small.
You take a loss on a trade, and then grieve that your trading position was too big.
If you could just get your position sizing right, then you could start making significant profits. Then you could have a realistic chance to become a CPT- Consistently Profitable Trader. Or then you could have a solid chance to achieve our trading goals.
But you do not know how to solve this problem.
Let’s offer a guide to do so for you from top to bottom.
1. Build your PlayBook
We have to start here because we MUST know what trades we will take. Give trades a name. Develop a trading strategy for each setup. Spend trading sessions taking trades in your PlayBook. Your PlayBook is your trading business.
If you are not familiar with how to build a PlayBook, you can see how I do this here.
2. Identify your A+ setups
What are your best trades? What trades in your PlayBook deserve the most risk? You should know the essential variables of these trades and how to spot them daily. And you ought to take them with more risk when they do visit. But first you need to identify them for your trading.
3. Develop B trades and feeler trades
There will be trades you want to take that are not A+ trades. You have edge in these trades. They just do not line up perfectly to be an A+ trade. We call them B trades. Take them. We just take them with less risk.
Then there will be trades that look like they are about to set up. But you are not quite confident that the trade is there. So you nibble. You get into the trade and watch it. Having some size helps you watch the trade better. We call this a Feeler trade. These trades get the least amount of risk.
4. Determine you max daily loss
If you are an intraday trader, determine the max loss you will take during a trading session. When just starting as a trader, keep this max loss low. Earn the right to take on more risk.
If you are a swing trader, determine your max loss for a trade. 2 percent or your capital is a common max risk for swing trades.
5. Think in percentages
Okay so now we have determined our max daily loss. Great step forward. Let’s say it is $1,000. Risk a percentage of this max loss on each trade.
For an A+ trade you might risk 30 percent of your max daily loss. So you could risk $300 on a trade.
For a B trade you might risk 15 percent of your max daily loss.
For a Feeler trade you might risk 5 percent of your max daily loss.
Thinking in percentages helps you scale easily from here. With success, you continue doing exactly what you were doing, risk a percentage of your max daily risk on each trade. All you do is increase the amount you are willing to risk.
6. It may take a few times to be right
When you spot an A+ trade, it may take you a few times to catch the trade. You might give yourself three tries to catch the trade. So factor that into your risk. If I think it may take 3 tries to catch an A+ trade, then I will risk 10 percent on each trade, and not 30 percent. I want to stay in the game until I catch the trade. If I risk 30 percent each time, then I may get stopped out, but still see an A+ trade present. But since I am stopped out, I cannot take another attempt at the A+ trade.
7. Size up after success
After a significant period of success, increase your risk by 20 percent. Rinse and repeat, continually.
8. Proof of concept
When trying a new strategy, to expand your PlayBook, keep your risk low. Earn the right to take on more risk. Prove that you can trade the new strategy with edge. Keep risk to 5 percent of your max daily loss for such experimentation.
9. Push yourself outside of your comfort zone
Your risk should make you feel uncomfortable in your A+ trades, but not too large that a loss would set you back. If you are comfortable in an A+ trade, then you are not big enough. Not being big enough in your A+ trades, is too risky.
10. Slowly and systematically increase your risk
Give it time. We have former $4,000-a-month traders, who now are seven-figure traders. They have slowly and systematically increased their risk to reach their present success levels.
11. Don’t be super rigid with your risk rules
Your risk rules are there as a guide. Do not exceed your max daily risk. Ever! But, trading is a fluid activity, where plans are amended on the fly. Strictly adhering to risk rules, can cause you to miss a trade. You could be there trying to figure out the risk, while the trade passes you by. And there will be times where you misdiagnosis the risk on a trade. It is more volatile than you thought and you will lose more. Trying to be perfect and super rigid can make things worse.
12. A+ trades will fall in your lap
The best trades just come to you. You observe. You spot a huge opportunity. You wait for confirmation. You see it. And then you can just pounce. Understanding this ought to give you the confidence not to force lesser trades. This ought to accentuate the importance of saving risk for the best opportunities.
13. Risk changes during the trade
A Feeler trade can turn into an A+ trade. An A+ trade can turn into a Feeler trade, if the stock is not acting well. Adjust your risk as you gather this new information.
14. There is someone bigger and better than you so keep pushing your size responsibly
As long as liquidity allows, keep pushing yourself in your best trades. Recently, some traders on our desk had a six-figure day and were feeling great about their success. That was until they learned that another prop trader had made over 500k during the same session, and then felt like pikers.
Keep pushing! How good can you be? How big, responsibly, can you trade that setup?
Below is a video of an experience trader, chatting with our new hires, on how he determines position sizing. I encourage you to watch and listen to this professional prop trader on sizing.
*no relevant positions