Are You Risking Too Much?

We here at believe that proper position sizing is THE single most important skill a trader should have. Yup, that’s right – it’s THAT critical!

But before we get down and dirty with the details of position sizing, let’s define it first.

What is proper position sizing?

Simply put, proper position sizing means setting the correct amount of units to buy or sell a currency pair. In other words, it involves finding the position size that will keep you within your risk comfort level.

Why is it so important?

Proper position sizing is a key element in risk management. And as we’ve been told many times, risk management can determine whether you live to trade another day or not. It can keep you from risking too much on a trade and blowing up your account.

Sure, when you bet big, you can win big. But what happens when you lose? You don’t need to be a brain surgeon to figure that one out – you lose big, too.

Without knowing how to size your positions properly, you may end up taking trades that are far too large for you. In such cases, you become highly vulnerable when the market moves even just a few pips against you.

How do we prevent ourselves from risking too much?

Identify and acknowledge

Nobody does something just for the heck of it. Binge eaters don’t just overeat just so they could eat a lot. In one way or another, they get something out of it. Some sort of self-fulfillment perhaps.

The same is true for a trader who always finds himself betting too much on his trades even when past experience tells him it’s not a good idea. Why does he keep on doing it?

A little introspection can make one realize that it’s more than just about being greedy. For most traders, they realize that their aggressive behavior is tied to their self-worth. They bet big in hopes that they win big. The prospect of massive gains consequently makes them feel good about themselves.

The problem though is that they don’t fully understand how much they could lose and they find themselves being unable to control their emotions when price goes against their way, even by just a few pips.

In order to address it, one has to acknowledge that there is indeed a problem and that will make a trader realize that this mindset is flawed. With time and conscious effort, he will eventually realize that his trading positions don’t measure his worth as a trader.

Know your limits

You also need to find out your tolerance for risk. There are two opposite sides in the trading spectrum with one extreme being risk-seeking and the other being risk averse. Do you know where you stand?

Although most traders risk a fixed percentage of their account on a trade, there’s no one-size-fits-all method to go about it.

Before you even get to the mathematical aspect of it, you first need to determine your psychological limits for risk. If you’re unsure how to go about it, take it slow. Adjust your position sizes according to the potential losses that you know you can sustain. The basic rule is to keep them small enough so that even when you lose, they don’t evoke any strong emotional response that could derail your trading.

Often times, traders make the mistake of focusing solely on finding the perfect entries and exits. But what really spells the difference between successful and unsuccessful traders is risk management. It’s something that should never be taken it for granted. And the first step towards smart risk management is proper position sizing.

  • Brian Kurtz

    My feelings on this are that one should setup three sub-accounts and split one’s account balance between them. Label the accounts as: Conservative, Assertive, and Aggressive.

    The Assertive account should be the “base” account to which the risk percentage of the others should be scaled. Conservative accounts should be 1/2 the position size of the base account and the Aggressive account should be double.

    A good breakdown would be be as follows:

    1) Aggressive Account – max 5% of aggressive account balance

    2) Assertive Account – max 2.5% of account balance

    3) Conservative Account – max 1.25% of account balance.

    From here we would run two computers each with a trade manager like FX Synergy. One computer would run the Assertive/Aggressive accounts and the other would run the Conservative account.

    The idea would be to run the same system on all three accounts. How one’s total assests are distributed between the accounts is the tricky part.

    With the Assertive/Aggressive accounts, you’d set the trade manager to initiate a clone trade on the Aggressive account with 2x the risk of the Assertive trade whenever the trigger is pulled. One-click trading for two accounts. At the end of the week, you move the funds around so that they are split evenly between the Assertive/Aggressive accounts.

    So trade the accounts per one’s system and at the end of the week re-distribute the funds so that the Assertive and Aggressive accounts have and equal balance. You’d do this because, currently, no trade manager can properly scale position sizes on the fly regardless of the unmatched RATE at which the accounts grow or shrink. Settling up at the end of the week helps offset this effect without injecting additional money management complication or trade-by-trade mini-adjustments one would have to do manually for each trade once the “aggressive” sub-account grows or shrinks too much as compared to the assertive sub-account.

    But what about the Conservative sub-account? Well, on Day #1 of trading, one would evenly distribute ALL funds between all three sub-accounts. From here one does the balance/redistribute on Friday of each week between the Assertive/Aggressive sub-accounts only.

    So how does money move into the Conservative sub-account? On a set schedule. You create a plan where you remove 50% of the combined balances of the Assertive/Aggressive accounts and transfer them to the Conservative account. So it might work out like this:

    When Assert/Aggres reaches: $50,000 Transfer $25,000 to Conserv. Sub-Account.

    When Assert/Aggres then reaches: $100,000 Transfer $50,000 to Conserv. Sub-Account.

    When Assert/Aggres then reaches: $150,000 Transfer $75,000 to Conserv. Sub-Account.

    Over time then, (assuming one’s system is successful in the long run) the Conservative account would grow to the point where it could never be scaled by a simple multiple of the Assertive account. This is why you run it on a separate computer with a separate trade manager. When your signal presents itself, you keep your finger on the trigger of both computer’s mouses (mice) and click the “buy” button on both at the same time (if you’re doing market orders) so that the orders go in at the same time. The Conservative account, though is being sized to itself at 1.25% of it’s MUCH LARGER overall balance while the Aggressive account is being sized by a factor of 2x to the Assertive account’s max 2.5% trade with the balances between these two riskier accounts being normalized at the end of each trading week.

    The end result is that one gets to enjoy all aspects of trading. Between the Assertive/Aggressive accounts you’re putting up pretty big size on each trade and as time goes on they help the Conservative account grow at a much faster rate when times are good than it would if one just used a flat 1.25% risk on 100% of available funds. When the inevitable bad streak comes though, and the conservative/assertive accounts experience massive (70%+ losses) the Conservative account will only experience a much more mild drawdown.

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