One of the “secret sauces” to successful long-term trading is the ability to smartly adjust my position sizing to better take advantage of opportunities.

Feels like I’m often thinking to myself that my losing trades were position-sized too large, and my winning trades were position-sized too small. That will always feel true. Makes sense. But I don’t have a crystal ball to know ahead of time which trades will be the winners and which will be the duds. And I can’t go back in time to change my decisions.

So what can I do to increase the odds that I win bigger and lose smaller?

The simplest way is to risk the same percentage of my account on every trade — say 50 basis points (half of 1%) of my total risk capital. In this scenario it would naturally lead to my position sizes increasing when I’m winning (because my capital base is rising), and conversely, my positions shrinking during losing streaks.

This is a perfectly acceptable risk management strategy. But maybe not the best. I don’t believe there is a “best.”

Another way is to systematically add to my winning positions. When I get into a trade and it starts working, I can add more units (shares or options contracts) as my open profits continue to build in the trade. Some call this pyramiding. Whatever you want to call it, it can lead to some monster wins when I get a hold of a good trend. But these positions become harder and harder to hold as my PnL volatility increases with each additional unit. It takes some stones to sit through normal pullbacks that might feel exponentially worse to me due to my larger-than-normal position. Easier said than done.

A third way to increase my odds of winning bigger and losing smaller might be to only position bigger from the start when I’ve got a PnL cushion giving me a position of strength. This probably makes more sense if I was day trading. Basically, the thinking here is as my intraday profits pile up, I may risk my normal amount + some percentage of my current daily gain. For example, let’s say I’m usually risking $500 per trade; at midday, I’m currently up +$1,200 on the day. Maybe I’m willing to risk 25% of my open profit in addition to my normal risk. In this case, I’d risk $500 + (.25 x 1,200) = $800.

This is not an exhaustive list of ways to alter my position sizing, but it is three common approaches I use and I hope it may spur some brainstorming on your end to help you level up your risk management game.

What works for you? Please tell me about it!

~ @chicagosean

I talk about “control” a lot in these letters – our want for it, and the harsh reality of the situations we face as traders.

To succeed long-term, I need to be ready for anything and accept whatever happens.

This is good advice for almost anything (but not everything) in life. And it is absolutely great advice for all my trading!

With proper planning, strategizing, execution, and risk management, I can put myself in a position to win, get lucky, or not lose too badly. These are the things I can control.

I cannot control what the markets actually do. Therefore, assuming I took care of everything above, I need to be accepting of whatever comes.

Accept it. It is what it is. My wanting it to be something else won’t change it – whatever it is.

Once I start personalizing everything, making it a referendum on my amazing intellect or my incredible stupidity, then I’ve lost all objectivity and any hope of rational decision-making goes out the window. When that is lost, it’s only a matter of time before the loss of capital follows.

If I put enough effort into controlling what I can control and putting myself in positions to get lucky once in a while (creating my own luck!), then I live a much happier trading existence. 

That’s when trading is fun. And when trading is fun, I’m doing it right.

~ @chicagosean