Thursday, April 30, 2020

How To Size Up Your Trading

An issue I hear quite often from developing traders is how to size up their trading.  They've traded in simulation mode and then live with small size and they are seeing promising results.  Now is the time to make the most of their market edges.  What is the best way to do that?

Allow me to offer an analogy:

I work out each morning and include a run on the treadmill as part of the workout.  The treadmill is programmable for level of incline and speed, and it monitors heart rate in real time.  That means that I can set the incline and speed to keep myself in a target heart rate zone for best cardiac fitness.  

This morning I ran at my recent levels of incline and speed and could no longer get myself to the target heart rate.  I had to increase the speed to a new level.  

Toward the end of my run, I gradually decrease the incline and decrease the speed and wind down.  Today, when I moved my speed lower at the latter part of my run, my lower speed was my former peak speed.  Surprisingly, the level that had been my peak now felt like winding down.

Sizing in our trading is like the speed setting on the treadmill.  We have to set our size to challenge ourselves, but not overwhelm.  At some point, we adapt to a given sizing and it no longer challenges us.  That is when we can step up on the trading treadmill.  When we move higher in increments and adapt to a new level of challenge, that creates a staircase of improvement.  Step higher, adapt, step higher...what was the higher level now becomes a step down.  That's what builds our resilience and trading fitness.

Notice that markets themselves become more and less volatile and impact the movement for a given level of sizing.  Our sizing needs to adapt to the volatility of what we're trading by making sure we're risking similar amounts in different environments.  That's the incline of the treadmill.  I don't run at the same speed at a very steep incline as at no incline at all.  Markets change incline for us and our size has to take that into account.  By risking a similar amount per trade across markets and stocks, we can ensure that we get the right workout and don't overwhelm ourselves or remain stagnant.

Your bumps in sizing, like your progress on a treadmill, should build your sense of confidence and control.  When you no longer break a sweat at one level, you know it's time to move to the next.  And if a new level is destabilizing emotionally, you know that you need to readjust your treadmill setting lower.

Further Reading: