Position Sizing

A key part of a trading strategy is position sizing. My position sizing methodology is described here. The general idea is to have a plan to approach either building a position, or taking a full position in one trade, while adjusting position size for volatility of a given asset class. This is a general guideline. I do sometimes get more aggressive on equities, ETFs and commodities if I feel that the setup is ideal.

My approach to trading is discretionary rather than mechanical. I look at a multitude of factors before I commmit to a trade. I don’t like mechanical systems as they are prone to large drawdowns. I believe the human brain using a discretionary trading system can outperform simple mechanical systems (high frequency algos is a different topic). Of course, without strategic and emotional discipline then this statement is false.

I don’t know how I could program my trading approach. The only potential way I could do that is with a machine learning model, which would be a major undertaking. One I am somewhat interested in pursuing in the future.

I generally buy on weakness with well defined support areas. If these support areas are breached then I will get stopped out hopefully at a percentage loss near my expected risk amount. Naturally, that is not always the case, particularly with high volatility positions. I can plan for a 1% loss yet lose 8% due to e.g., a gap down on news before the open. It is part of the game. Appropriate position size with clear stop losses at well defined support lines are vital to succeeding. You can lose all of your money trading in the middle of the slop over numerous trades for small losses. You have to have an edge when picking your spots.

I am not a big fan of buying breakouts. It can work but I find it tends to shorten durations. Prices tend to stair step. I too often see breakout lines violated in process of higher lows for example. I just prefer to buy the oversold pullbacks.

I do not place stops in my orders. I use alerts and then manually close the trade if it looks like the position will close below my stop at the end of the day. Obvious stops are often run though by huge institutional traders only to see prices reverse before close.

I strive to keep losses on every trade under 1% of the total account. This is achievable by buying at well defined support levels and being patient, taking only quality setups. If you get stopped out for a small loss so be it. Perhaps another set up will emerge later. If you are not a one trick pony and have a durable system that can be applied to many if not all markets, then patience is much easier. Striving to keep your per-trade risk to under 1% while letting your winners run can lead to success.

A link to a google sheet example (using hypothetical account sizes) is available here. It shows how I apply the position sizing guidelines to different accounts (individual sheets within the overall google sheet are dedicated to different accounts: Trading, IRA, 401K, HSA etc.). It calculates risk for each position in dollar and percentage amounts. I simply fill in the “Purchase Price” and “Stop” columns to quickly calculate the number of shares I should buy per account. This approach greatly expedites my process of planning and executing trades.