It's not the Price, It's the Position That Matters

Apurva Sheth
Do you wake up in the middle of night to check the American markets? Are you worried about your positions first thing in the morning? Do you frequently check the latest SGX Nifty quote when our markets are closed?

If the answer to any of the above questions is yes, then something is wrong with your trading. Most people would say the cause of their trading anxiety is their entry price. But that’s not true. The problem is their position size. Position size is the number of shares or lots (if you are trading futures) that you hold in a trade.

Let’s clear a few misconceptions about price before we talk about size.

Most of the time, when a trader is stuck in a trade, they curse the moment they decided to enter the trade. They go into a wishful thinking loop and build scenarios with different price levels.

‘Only if I would have entered at a lower price, I would still be profitable... Only if I would have entered at a lower price, my loss would have been small,’they think. But this line of thinking is wrong.

If you have followed your process properly before making the trade, then your decision to enter wasn’t wrong. If the trade was right, you’d enter. If it wasn’t, then you’d leave it. You took the decision to enter based on the facts and data available at that time.

But once you enter the trade, you do not have any control over the price. Only hindsight will tell you if the entry price was right or not. Once you have entered the trade, entry price shouldn’t be a concern at all.

Unfortunately, most traders fail to look beyond price. They end up either pitying themselves or cursing the markets when things don’t go smoothly...when the real reason for their anxiety is the wrong position size.

Yes, the problem is with the quantity of stock they have bought, not the price. Probably, they have bitten more than they can chew and digest. Most newcomers trade in much bigger quantities than they should.

A big position always causes anxiety. And the larger the position, the greater the danger that trading decisions will be driven by fear rather than judgment and experience. So you should always trade within your emotional capacity.

One way to test if you are trading beyond your emotional capacity is if you are preoccupied with your positions throughout the day. If you can’t put down your smart phone without checking prices every five minutes, you are trading beyond your emotional capacity. In such cases, one would be better off reducing the position to a comfortable quantity.

How does one find the ideal quantity to trade?

The ideal quantity for a single trade is one where you do not risk more than 1-2% of total capital. Most traders prefer to keep it below 1%. The logic is that it will be easy to recover from a drawdown. With 1% at risk, you get 100 chances before your initial capital is completely wiped out. Risking 1% or less leaves room for a trader to make back what he has lost.

The actual percentage you chose will depend on your strategy. At Swing Trader, we use even less - not more than 0.5%. This gives us enough room to make back what we may lose and to take on more positions at a given time.

With 0.5% of our capital at risk, we have traded 7-8 stocks at a time. If one were to risk 1% of our capital, then the number of trades would be lower. It also means that you would gain and lose more on each trade. So it’s a tradeoff, and every trader is free to choose how much capital he wants to risk on each trade.

But whatever he chooses, a carefully considered position size rule helps contain risk. Even better, it helps to trade peacefully and enjoy trading to the fullest. At Swing Trader, we enjoy trading.

Do you?

Do you enjoy your trading? Share your views in the Club or share your comments here.

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3 Responses to "It's not the Price, It's the Position That Matters"
21 Jul, 2017
It is simply superb suggestion and a very good lesson for a novice like me. Thank you...Like 
18 Aug, 2016
when I look back at my trading experience I find what you write is 100% correct.I should not exceed 1% of my capital in a single tradeLike 
27 Apr, 2016
Position sizing is important for every trader.Like (1)
We request your view! Post a comment on "It's not the Price, It's the Position That Matters". Click here!