Size Matters to Traders, Too
Size Matters to Traders, Too
It is the decision that invariably determines your long term trading success
- Size is the reason too many traders lose over time.
- A trader can be right on direction most of the time and still lose if their size is too big.
- Changing your average position size and dollars at risk too frequently can result in a near 100% chance of risking ruin.
The most important decision traders have to make is not whether to buy or sell, but rather how big the position is going to be and how many dollars will be at risk.
Your risk when buying or selling stocks or futures
Take a simple trade like scalping equity futures at the market open.
The volatility (on average) of a /ES contract after the open is roughly two times greater than the volatility of the same contract before the market open.
That means someone who is trading one contract of the /ES futures before the open could see the actual risk jump by 100% if they hold the trade through the opening bell. Why is this important?
If the trade is going in your favor before the opening bell, by holding the trade into the opening market session that means if you are wrong on the direction, you could see your position lose money even though you were right on direction before the opening bell.
In this example, you saw two periods, one with high volatility and one with low volatility. In both periods, the actual dollar value of the position remained the same, and your success rate in picking the direction was 50% (right before the open, wrong after the open). However, if you were wrong in the period where volatility was greater, you may be at a net loss even though your direction picking was 50%.
Another example of this phenomenon can be found at the blackjack table in Las Vegas. If you press your bets while playing, you automatically reduce your probability of walking away with money because you are increasing volatility after a win. Like in the last example, you could win 75% of your hands and still walk away a loser because the hands you lost cost more money than the hands than you won.
Keeping our win rate and sizing consistent
Have predefined stop losses and profit targets based on dollar amounts only, regardless of how volatile the market is.
It sounds intuitive, but staying disciplined in this area is the biggest differentiator between long-term winning and long-term losing traders. Setting predefined profit targets and stop losses not only keeps you discipled but also forces the win rate and size to be consistent over time no matter what happens in the markets.
As an example using a bracket order, if you set your profit target on a trade to be $100, and your stop loss to be $200, then you essentially force your win rate to be 67% and the volatility in your portfolio will remain the same because the amount you are willing to make or lose on any trade is the same regardless of what the market does.
Taking this one step can turn your unpredictable results into a much more consistent portfolio over the long term.
Anton Kulikov has a decade of trading experience. He leads research content creation at tastylive, appears on over 20 live shows including Futures Power Hour, Options Jive, and Research Specials LIVE co-authored bestselling investment strategy book Unlucky Investor’s Guide to Options Trading, and contributes research content for Luckbox Magazine.
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.