Hey Trader,
I’m having a really bad couple of weeks.
My account is down about 2% since this stretch started.
A lot of my friends hold the same positions I do. They’re down 8% to 9%.
They ask me how I cheated.
You’d think that many of these guys, who are experienced traders, would understand the basics.
Yet, they, like most people fail to master the “golf grip” of trading: position sizing.
And all it takes is just a few simple sizing rules that I’ll cover today.
Look, everyone wants to hit a homerun or at least maximize their potential profits.
However, nobody survives without proper position sizing. That includes me.
When I taught this at Loyola on Wednesday night, one of my students, Manish, came up to me in class and told me sizing was the whole deal.
So, give me a few minutes of your time to show you how to pick the right position size and avoid the most common mistakes.
Rule 1: Cap Every Position Before You Buy
My friends and I own the same names. I just hold mine at a 2% to 4% weighting.
My sizing rules start with a hard cap. Nothing in my portfolio goes over 5%.
My average trade runs 2.8% to 3.2%. My largest position right now sits at 4.28%.
With those numbers, there’s no way I go bankrupt.
That weighting gives me survival skills when I get whacked. I got waxed on Wednesday, and my wife said I was in a bad mood.
I’m still trading today.
I have positions in stocks that have been whacked. I’m down about $10 in one of them, and people ask me why I’m not stressed.
I own 25 shares. I don’t own 200.
If you position size incorrectly, there’s no tomorrow.
Rule 2: Intraday Sizing Rules By Product
An intraday trade has a clock on it. You have to be flat by the close, with zero delta either way.
That clock makes sizing matter even more. Intraday, you trade small.
Here are my intraday sizing rules by product:
- Stocks: Go up to 2% of your account.
- Options: A quarter of 1% is your minimum. Half of 1% is your most.
- Futures: Know the contract before you touch it. On oil, a $1 move can put you down $1,000.
- Anything unfamiliar: Start with 10 or 25 shares. A $1 drop on 25 shares costs you $25.
Turning those percentages into dollars takes one step. Multiply your account by the percentage.
On a $100,000 account, 2% gives you $2,000 for a stock trade.
Half of 1% puts $500 at risk on an option. Even that’s a lot.
Options get the smallest number for a reason. They’re a lot easier to lose money on than stocks, on a percentage basis.
Say you sell an option at 2.35. Selling it means you profit if its price falls.
Instead, it squeezes to 7. That’s a $465 loss on one contract.
Rule 3: Trade The Same Size Every Time
Sizing rules only work when you follow them every time. Once you pick your number, it stays put.
I don’t add size when I’m winning. I don’t add to losers or subtract, either.
You have to be systematic all the time.
That consistency lets the math work for you. I trade small enough to work the way Don Kaufman does.
Don takes a loss, then another loss. Then he starts hitting some good winners.
Two or three good winners can offset seven losses. You’re still ahead.
Small losses leave you room to come back. Lose $50 on a $100,000 account, and you’ve still got $99,950.
Get back up and go again.
The Mistakes That Break Your Sizing Rules
Each of these mistakes breaks one of the sizing rules above. Watch for all three:
- One oversized trade. Put 10% into a single intraday trade. A $100,000 account can be $90,000 by the end of the week.
- Doubling down after a loss. You get behind and saddle right back up to the bar. Then you double down to win it back.
- Pyramiding into losers. You keep adding to a position that’s working against you. The ball just keeps rolling downhill.
The first one moves fast. Within a month, you’re back at your old job laying bricks.
The second one ends careers even faster. If you double down after a losing intraday trade, you need to quit the business.
When you lose money, you don’t add to it. You don’t throw good money after bad money.
Lose in big clumps, and you’re not coming back. You’ll do what 90% of intraday traders do and pyramid into losers.
You can avoid all of it with three habits. Minimize the mistakes, let the winners run, and size every trade to keep you in the game.
Sizing limits what a bad entry can cost you. A good entry rule keeps you out of bad entries to begin with.
The Genesis COG System has one I never break. You never buy the dip, at any price.
I never buy on the way down. It’s a bottomless pit.
You buy when a stock flattens out or consolidates. Being a little late to the trade is okay.
I give Genesis COG members the same advice every time. Let it play, and let it consolidate.
Put that entry rule together with the sizing rules above. You’ll stay in the game long enough to catch the turn.
Enroll in the Genesis COG System
Professor Jeffrey Bierman
Creator of the Genesis COG System
