The Importance of Position Sizing for Trend Trading

In a couple of my earlier articles as well as my interview with David Penn (Read Part 1 and Part 2 of the interview here), I expressed disdain for day trading. Strange view by a former pit trader who only day traded for many years.

Of course floor guys had advantages that you don't. I believe most of you would be increasingly successful by trading smaller and for bigger multi-day swings. The pursuit though of swing profits shouldn't mean that you need to sit with swing losses. In these markets you need to develop such flexibility that a long term position will be exited immediately if your technical or fundamental view is invalidated. By imposing a few rules to your discretionary trading you'll hopefully not be hung out to dry during those frequent periods when your big picture scenario is out of sync.

Assume You're Going to be Wrong and Position Size Accordingly

Why would you assume otherwise? Oh, because you're smarter. Here's a clue. Everyone who's trading big enough to move these markets is smart. Genius smart. Winning traders are either wise guy smart from the street or quaint smart from MIT but a fool and his trading capital are soon parted. Your higher intelligence is merely a required prerequisite to stay a few extra hands at the table but it's no edge by itself. Here's a good example for you football fans of zero sum genius. Let's say we clone Bill Belichick so that he’s coaching every team in the NFL. Those 32 Belichick’s at the end of the season would have a combined record of exactly .500.

So assuming your best guess might not be even as good as a random-trade position that won't annihilate you when you're wrong. Nor if you're wrong again. And again. If you need room then take it. But keep your size down correspondingly. Not to mention if you're as smart as you think you are, then why feel the need to kill it on each trade? Your innateness should give you insight advantage over a wide sample of trades. Hubris is a tool. Use it.