Hey everybody, it’s Michael Martin. Thanks for being here. So I wanted to do some follow up on the video I did on position sizing. The title was What Most traders Get wrong about position sizing, which again, we’re splitting hairs here, right? So it’s not definitively wrong or they’re definitively right, because the thing ebb and flows and you’re really making these adjustments in real time. So say you’re working at a place where they have these tiers, to me that’s more of a managerial decision, right? Than it is looking at things based on the dynamic volatility of the marketplace. And I can see why it’s done, and I think it’s prudent, right? So I’m not, I’m poo-pooing it, but what it does do if you’re in that process is it conditions you to think in one particular way. What do I mean by that? Well, at any given time, your line of credit, your account balance, whatever it is, is reacting to the positions that you have in the marketplace.
And in my opinion, we really make and lose our money by position sizing, not by, that’s why I go crazy when I hear these companies talking about technical packages and technical analysis and sniper your entries. It’s not really that important. The sniper your entry. Yeah, again, if you’re trading 30,000 shares of a 6 cents stock, a penny can be painful. But I’m talking about trying to make real money with positions over a longer period of time. You have to be able to sleep at night, but also have enough risk on so that it makes sense for you when the thing does move in your favor. So think about having a hedge. It can be a beautiful eight foot hedgerow, but still, it still needs to be pruned. So when you find yourself in a position, and again, I’m not talking about intraday stuff, I’m talking about taking risk home overnight over the weekends, you have to conjugate that position size right?
With the volatility of the instrument and also with respect to where your account balance is. If you are up 200% already year to date, regardless of your account size, emotionally, you can free wheel a little bit. Not to just gamble, but you have it to give. Whereas if you’re in an A 20% drawdown and you’re trading 80 cent dollars, it’s a different mindset on how you handle the risk. So my take on all of this is that focus on your position sizing and dynamically adjust that because if you’re trading, say tens, for example, 10 contracts or a thousand shares of 10 future contracts, maybe five option contracts and maybe share sizes, you’re looking at a thousand shares, you might find that you can optimize your behavior better if you looked at say, 1,050 shares, right? Or 900 shares for your style of trading.
So that you can do that by testing. You can also do that by looking at the results that you have. So where I do think entries and exits are important, they have to be conjugated to the position size because you know, can’t just say having a $1 stop, for example, or a 10 point stop on the EI or blah blah blah is optimal until you’ve actually done it in real time. And then you might find that you don’t have enough risk on, which is actually a big problem in my experience. I think the professional traders do a really good job of knowing not to have too much risk on, but the one thing that I found is that oftentimes they don’t have enough on, and this is in the face of me totally agreeing with the idea that the job for us as speculators, as traders is to play superior defense.
That’s job number one. And so, yeah, that seems weird to hear when you’re thinking about, well, our job is to make money, but at what cost? Because ultimately, if you see somebody and they’re in these trading contests and this and that, which I don’t necessarily think they mean anything, it can bring out the worst of you because the key is risk adjusted returns. If you’re going to make 150% but have to live through a 60% drawdown, is that the type of trade-off that you want? Whereas if you make an 80% and you only have an 8% draw down, that to me would be remarkable. You see what I’m getting at? So I think you have to look at risk adjusted returns to what is the return that you’re getting for the risk that you’re taking, because you always have to be concerned about the draw down, which I think you have to ensure against first. And that becomes a function of your entry and your exit and your position sizing. So don’t sell yourself yourself short by trading too small and don’t be throw caution to the wind by trading too big. I think the position sizing thing is much more dynamic. And even if you’re going to trade, say gold futures or Nvidia stock, even if you’re risking say one quarter of 1%, you might find that your position sizing is different from day to day to day.
So look at it and make sure that you, it’s at least something that you think about from time to time. I’m going to do a longer form video on adjusting position sizes and how do you know when and how to scale? Cause it’s very hard to do in an audio only format and it’s going to take some whiteboard action. The only problem that I have right now is that I don’t like the whiteboard action scenario that I have here. I have to use a tablet and a stylist. And the quality of the video for your viewing hasn’t, doesn’t come out as good as if I’m using the 4K camera that I have here. So I’m going to work on that and figure out what’s best so that I can go through some examples so you can kind of see, because I think one of the things that guys do,
Especially they’re newer, they’re younger than, they have smaller account sizes. They want to go from trading ones and twos to twenties, and it’s just not practical. It, you don’t make that type of a leap. It’s much more dynamic based on the volatility of the instrument that you’re trading as well as the size of your account. So the growth is much more gradual. You go from ones to twos to twos to threes to threes to fours like this and that. It’s not practical to jump by. That type of a factor of say, five or more, unless you’re going to get a bigger allocation or to place where you’re working, gives you a larger allocation or a line of credit, so to speak. So you want to stay kind of consistent in your behavior. Part of that behavior is choosing the most dynamic position sizes for the risk that you’re willing to take.
Again, we talked about patience yesterday. It’s going to take you a while to get where you want to be. Again, what’s the goal? Do you want to walk around town and say to everybody that you’re trading twenties? Because to be frank, no one’s going to care, doesn’t mean anything. So you want to think about focusing on what matters most, and that is, can you behave consistently? Behavior predicts where you end up. So focus on what really matters more than stuff that might satisfy your ego. There’s nothing to feel insecure about. Everybody starts with zero. Richard Dennis, right of c and d commodities who trained all those turtle guys. He started with a couple hundred bucks.
Everyone’s got to start somewhere. So just enjoy the process and focus on the process as opposed to, I want to beat Paul Tooter Jones in a year. It doesn’t work that way. So it goes back to being patient, and I think growing your money has a lot to do with, yes, your entries and exits do matter, but they have to be conjugated with the position size because that’s where we make and lose money. As always, I appreciate your feedback and your comments. Please like and subscribe and send your comments along. I don’t have all the answers. I can only speak to what it is that I’ve gone through and then share my experience, strength, and hope that it might help you in your endeavors and in your journey as you grow in this business. All right, so thanks for being here, folks. I will see you next week.
Click here to get your free copy of The Inner Voice of Trading audiobook.
This is an automated transcript