How do you determine when to increase your position size? In this episode, John and Stephen discuss the many aspects to consider before increasing your trading size and how your sizing strategy can affect your returns.
Click here or in the video below to learn more!
Many traders lose money because of how their position sizing strategy interacts with the larger context of their trading plan. Most traders will start small. If they lose, they change strategies. If they win, they increase size based on the frequency of their wins. When they inevitably lose, they decrease size and start the process over again. This results in losing money, regardless of the actual trading strategy.
The Negative Mental Loop
Losing is a part of trading. Keeping a good mental game in situations where you lose is key. If your mental game is off, you could be throwing away the best trading strategy simply based on luck rather than evaluating the trade for what it really is. Regardless of your trading strategy, you will always run through cycles of wins and losses. The way you handle the wins and losses is what will determine if you are ultimately profitable.
Financial and Mental Risk
When you trade, there are two types of risk: financial and mental. Ideally, you should be able to take 3 consecutive losses and continue to move forward without decreasing position size or temptation to switch strategies. If you are unable to do so, you may be basing the quality of your strategy off of luck-driven, short-term results. There is no faith in the trading strategy. If you understand your strategy and its current edge in the marketplace, then you should not be decreasing your position size based on recent losses.
The Bottom Line
Be very careful evaluating when to increase your position size. Do not be fearful of losses, and be prepared to lose. If you are not prepared for the amount you could lose, your trading size is too large.