(Note: this post is adapted from the Trading Success Roadmap product I’ll be officially offering soon.)
A common mistake I see even experienced traders make is poor position sizing.
Sizing your positions thoughtfully is fundamental to any trading strategy. A poor plan for position sizing can turn an otherwise profitable trading strategy into a loser.
Take the following two hypothetical trades:
- A) You go long 100 shares of AAPL at $186 with a stop price of $176. You exit with a profit at $190.
- B) You go long 100 shares of AAPL at $186 with a stop price of $185. You exit with a profit at $190.
Notice how in both scenarios the outcomes are identical:
- The same entry price
- The same exit price
- The same number of shares
- The same profit of $400
But look closer and notice the important difference.
In A) your initial stop price was $10 away – if the stock went against you and hit the stop you would have lost $1000.
In B), however, your initial stop price was $1 away. In that scenario, if the stock went against you and hit the stop it would have been a $100 loss.
If you only evaluate the success of the trade based on profit, these trades look identical, but they are fundamentally different trades!
In A) you risked $1000 to make $400
In B) you risked $100 to make $400
B) was a far better trade even though the outcome was the same as A).
If you’ve ever had a big losing trade that wipes out the profits of several winning trades, there’s a good chance you aren’t sizing your positions properly.
The Trading Success Roadmap gives you a detailed blueprint for sizing your positions based on your risk.
Before I start trading any strategy, I have a required checklist of things to do to give the strategy the best chance for long-term success.
Proper position sizing is at the top of that list.
