The first step in trading is to choose a strategy, the next step is to choose a size to trade on order entry and to be consistent about it. Sizing a trade can be confusing so we are here with the data to explain why it is necessary and how it gives you the best chance at success to do so.
We used a mechanical one-standard deviation put selling strategy as an example. We managed winners at 50% of max profit. Losers were closed at twice the credit received (meaning when the price was twice what we received for selling it).
A table of five trades was displayed. The table included the number of the trade, trade size, credit received, P/L, net P/L of all five trades and win rate. Although the win rate was high the P/L was negative due to a loss on the largest sized trade. A second similar table kept all the trade sizes the same. This time the win rate was the same but the P/L was profitable. Had we kept our size consistent the loss would have been more manageable.
A table of three separate trades using a 2x credit loss as a guideline and a risk limit equal to $600 was displayed. The table included the trade, credit received, 2x credit loss and contract size of the trade. The table showed that with higher implied volatility (IV) we receive larger credits so we can reduce size to have the same amount of risk.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and a complete understanding of the importance of consistency in trade size to give ourselves the best chance of success.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.