I just wanted to make a new education post on position sizing strategies. This question comes up a lot and I thought I could make a quick guide on how you might be able to approach this for your trading!
I'm sure you've felt and experienced the tediousness of a listless, choppy market. Maybe as recently as the past month. April was a very difficult market for swing traders to find traction in and maybe the frustration even turned into overtrading for some.
Yesterday I tweeted this:
So what does any of that have to do with position sizing?
Well speaking in the terms of short term swing trade position sizing it means a lot! A very common error new and even sometimes experienced traders make is inconsistent and over sized positioning errors on their trades.
Why are inconsistent and oversized positioning errors a bad thing?
No matter your experience level in the market as soon as you start trading with your real HARD EARNED money emotions will naturally creep into the equation of the trade. Humans are naturally emotional beings and trading losses, especially in market conditions that just "ping-pong" up and down for extended periods of time can AMPLIFY these emotions!
Oftentimes traders size their trades much too big for their accounts. Leveraging positions and aiming for home run trades when in reality those types of trades are few and far between. While all of this is happening they set a stop loss much too tight to let the position breath. The stop loss is often too tight because the position size is simply too big!
This is where the "death by a thousand paper cuts" scenario begins to present itself! To top it all off the traders emotions start running in overdrive and they start to feel the urge to do anything to make back some of the losses. Over trading large positions multiple times a day only to try to make some ground back up! It rarely ends well!
What are some of these methods traders can practice to avoid getting cut up in the chop?!
Limit your total number of positions! In choppy markets 1 - 2 / normal conditions 3 - 4
Decrease position size and widen the range of the stop!
Allow your trades to breath! set looser stops slightly below major points of support
Create flexibility with larger cash positions!
What are some potential position sizing and capital management strategies for these markets?
In a short term swing trading approach consider limiting positions to 20% - 25% of the total account capital with no more than 2 total positions on at a time. (Stop losses should limit total capital losses to 2.5% max)
In a longer term portfolio approach consider splitting the positions into 10% maximum size with a maximum of 4 - 5 total positions on at a time. (Stop losses should limit total capital losses to 2.5% max)
Consider booking gains quicker in order to manage risk through the quick up and down, ping-pong type movement of the market.
The most important lesson to learn and practice is to not fall in the trap of over trading. This is where things can spiral out of control. Mentally, emotionally and the loss of hard earned capital. Limiting positions, creating less risk and more flexibility through cash positions can help counteract a traders tendency to fall into this damaging habit!
I hope this quick guide was helpful!
Cheers and happy trading!
Art of Trading