Position Sizing
STOP DIGGING-POSITION SIZING RELATIVE TO PERFORMANCE…
Check out the previous post “2% Rule” under the Resources and Concepts link on the sidebar. This is a follow-up to that post. In the 2% rule I discussed sizing your position relative to risk. Another part of the money-management puzzle is sizing your portfolio relative to your performance. Sometimes you’re hot, sometimes you’re cold. When you are on a losing streak it is human nature to really swing for the fences. We tend to, rightly or wrongly, judge our performance by our winners and losers or by the size of our portfolio. I say it is better to judge your success by whether or not you stuck to the proven concepts, principles and rules you have created for your style. I say do the right thing, for the right reason and let the results take care of themselves. This of course with the caveat that you verify the viability of your system through back testing. Not to get off subject-this post is about one of the concepts that some of the best traders in multiple markets have layed out. When you are down, you swing hard to try and make up for losses. Quite often we find ourselves digging a deeper whole. This type of mentality, while quite normal, falls under the same category as scared money. We just don’t make good decisions when we are losing money. So I say, if you are 10% down in one month, cut your trading size in half. In other words, put a 1% rule in place. Risk less money until you get back into the swing. If you are 20% down in your portfolio, consider going flat and taking the rest of the month off, paper trade, take a vacation, whatever. So, this post summed up-“if you find yourself in a hole, STOP DIGGING!”.