Hey trader,
My neighbor texts me every morning before the bell. He’s at the therapist’s as I write this, and he’s on Xanax.
The reason is one stock.
He’s got 25% of his money in Microsoft, and he can’t sleep at night.
I asked him why he won’t just liquidate it. He told me he can’t stomach the tax bill.
He needs to find an accountant and hedge it off. Because at this rate, he won’t have anything left to pay tax on.
He keeps telling himself it’ll come back. Nobody knows if it ever will.
This is the trap that ends trading careers.
It has nothing to do with your stock picks.
By the end of this you’ll have the exact rules I use to size every position.
Get them right and a 1,000-point down day barely touches you.
Why Traders Really Quit
When people lose big, they vanish. They sink into depression and anxiety, and they swear off trading for good.
Here’s what they never understand. The stock picking was never their problem.
They never learned how to manage risk. That’s the whole story.
I teach this at Loyola. The class is Finance 553, the most rigorous PhD course on the schedule.
Last year I had 28 students. It was the largest class they’d ever seen.
I tell every one of them the same thing. It comes down to asset allocation and position sizing.
Nothing else keeps you alive.
The 5% Ceiling
No position in your portfolio should ever carry more than a 5% weighting. That is your hard max.
When you step into a stock, you enter at a 3% to 4% weighting. You never start bigger than that.
Let me make it concrete. Say you run a $100,000 portfolio and you want to own AT&T.
You buy 200 shares. That runs you about $4,500.
Divide $4,500 into $100,000. You’re carrying a 4.5% weighting on AT&T.
Once that position grows past 5% or 6%, you trim it. You sell it back down to where it started.
Right now I run about six shorts and twelve longs. Every single one is sized between 3% and 5%.
Not one sits above five. Not one sits below three.
On a weighted average basis, my whole book runs around 3.5%. That number is the entire game.
Options Are A Different Animal
A stock position gets 3% to 4%. An options trade should never exceed half of 1%.
The leverage built into a spread will eat you alive. Theta decay amplifies every mistake you make.
Here’s where traders fool themselves. Say you’ve got a $5,000 options account.
You put on a $5-wide spread for a $2.50 credit. Your risk on that trade is $250.
Divide $250 into $5,000. You just took on a 5% position.
That number feels safe. It will wipe you out fast.
The money disappears before you blink. You drop from $5,000 to $2,000 in a flash.
Now you’re down 40%, and you’re out of the game.
So I cap every options trade at half of 1%. I don’t run it at one percent or two percent. The ceiling is half of one.
Even half of 1% is a push.
Why I’m Still Standing
I haven’t blown out an account in 25 years. The reason is painfully boring.
My sizing is so small that a brutal session barely registers. A bad day for me is half a percent.
A good day looks about the same. That’s the trade-off I happily make.
If the market dropped 1,000 points today, it wouldn’t move me. I don’t carry enough risk in any one name to feel it.
Your opinion on the market won’t save you. Nobody cares what you think.
The numbers are what keep you alive.
Stay In Your Lane
Never let an equity position run past 5% or 6%. When it turns on you, it destroys your wealth too fast to recover.
Spread the risk out instead. Keep your average position at 3% to 4%.
Then the market can fall out of bed and you’ll survive just fine.
My neighbor never stayed in his lane. He bet a quarter of his money on one name, and now he can’t function.
Don’t be the guy on Xanax. Size every position before you ever worry about being right.
Professor Jeffrey Bierman
Creator of the Genesis COG System
