Friday, October 03, 2008

How Can I Trade the Way I Want to Trade?

A reader recently asked me a good question for these volatile times: "How can I trade the way I want to trade and not trade P&L?"

I will provide my answer to this question, but then I'd like to invite readers to submit their own answers via comments to this post.

For me, position sizing is a psychological strategy as well as a strategy for risk management. If I have a system for position sizing and a stop-loss level, I can define precisely how much dollar risk I want to put into a trade idea.

My position sizing is currently half of what it normally runs; I've made that a standard practice when VIX > 30.

What that means is that I am keeping my dollar exposure to the market relatively constant across various market conditions. I do not experience undue psychological volatility during market volatility, simply because I do not allow myself to have more dollars at risk per trade. That normalizes my psychological exposure, allowing me to focus on trade ideas and the management of my positions rather than P/L swings.

I realize this goes against the grain of many traders' thinking. They see volatile market conditions and think that they should be making a fortune catching the large swings. But, to use the old analogy, I'd rather be the casino than the gambler. I'd like to take my piece of probability out of markets on a nice, steady, regular basis. It's much easier to not focus on P/L when no single trade or trading day can make or break your month. My dollar risk per trade is no different now than it was during 2007.

So how do you keep yourself trading the way you want to trade during these volatile times? Comments appreciated!