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Why Does Position Sizing Matter?

Uncategorized Sep 06, 2020

After over 20 years of trading, and more importantly putting in the work to improve my trading day after day, week after week, year after year, I've learned a whole lot about what really matters in trading for a career. More importantly I've learned a ton about what doesn't matter all that much.

So when I get marketing, ahem, trading gurus, sending me information about signals and hot watchlists, I can almost guarantee that they really aren't professional traders who value the hard work it takes to become excellent at trading. But they are really good at marketing and getting traders to waste money on something that really doesn't provide true value. 

This is why I put so much effort in to getting really useful information out there to you. It may not be sexy and optimized, it may be a bit drawn out, I may cover a subject over and over and over, but it is because it is DAMN IMPORTANT!

One of the most important parts to successful trading is understanding what part of trading is really important and what isn't. 

The thing is, it isn't obvious. And honestly it isn't easy to just think your way through it either.

In an email I sent last week I went very deep on when/how to exit your trades. I'm going to stack on top of that email the subject of position sizing. Again, something that people really don't think too much about. 

Let's start by having a normal 50% win rate strategy. 

That is, you win 1 trade and you lose on just as many trades

  • 100 Total Trades
  • 50 Winners
  • 50 Losers
  • Average winner +1.5R
  • Average Loser -1R

Quick reminder about what R is. 

R is Risk, or how much you are willing to lose on a losing trade, and the R value can be 1%, 3%, or whatever % you want it to be. 

Now let's start with a notional $100,000 account

We have 10 trades and risk 2% per trade, with 5 winners and 5 losers

This is a simple 50% winrate long only QQQ trading with 2% Risk.

  • Beginning Balance $100,000
  • Ending Balance $106,928

Now let's see what it would be if we just did a flat 1,000 shares

  • Beginning Balance $100,000
  • Ending Balance $103,500

After 100 trades at 2% risk the ending balance is $162,907

After 100 trades at 1000 shares, the ending balance is $126,000

Where this position sizing really starts to work against you is when you are growing your account, each time you are adding profits to the account, you increase your position sizing accordingly.

Imagine having a great trading strategy, managing it diligently day after day for a full year and you end up with only $26,000 in profits for your efforts. 

Now imagine sizing your trades correctly and nearly tripling your returns. 

The amount of effort it takes to calculate the position sizing (about 10 seconds) would triple your income in this scenario.

And remember this is a 50% win rate system that makes a little bit more than it loses. 

This has nothing to do with the hottest watchlist, news, latest indicator or any other highly marketed (yet worthless) tactic. 

I hope this was helpful, if you have questions simply hit reply or ping me on Twitter. 

This is the sort of basics that you will need to know and have figured out before we being able to participate in the Trading Thunderdome. 

If you are interested in all of this and taking your trading to the next level, I've created a 50% discount for those of you on my email list to purchase the Consistently Profitable Trader course and the Systems Mastery Course

Systems Mastery

Consistently Profitable Trader

This is not the shiny glamorous marketing ideas that fake gurus try to sell you, this is the real deal tactics to learn and become a professional. 

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