Importance of Position Sizing

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Importance of Position Sizing

Position sizing can be tricky for both new and experienced traders alike.  While we always encourage our traders not to over-extend themselves, it can be hard to know when to scale up and when you need to scale down. Sometimes, smaller is better.

If you’re trying a new strategy or are completely new to trading, it is important to build your skillset first before entering larger trades.  Once you’ve earned the right, you can increase your capital as needed.  You don’t need to trade 10 or 20 contracts to make a good daily income.  This fallacy can lead new or inexperienced traders into a trade overcapitalized for their skill set and risk tolerance.  Start small and learn what to do first.  This is key!

Remember also that you don’t have to jump into trades all at once.  You also have the option to do a “segmented entry” or “scaling in” to a trade.  By buying in slowly and segmenting where you enter a trade, you can cut risk significantly.  You aren’t locking into just one price and can use the volatility of the market as an opportunity to cut risk while increasing your chance of getting filled in different areas of your trade.

Before you begin a trade, choose what sizing works for you and your financial situation.  Everyone’s situation is different, so what works for you might not work for someone else and vice versa.  Make sure you’re taking into account your personal risk tolerance and trading plan criteria to avoid over-extending yourself.

Just remember, trading small doesn’t mean you’re making a small income!  All it takes are few small wins are equal to one big win.  While it may mean entering more trades to reach your daily goal, you help build your experience and also reduce your own risk by minimizing the amount you put on each trade. By trusting your skill-set, you too can succeed as a trader!

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Sachin Sival is the founder and CEO of Replete Equities, an options trading company that specializes in delta hedging. A self-taught trader, Sachin has a passion for volatility trading and stock trading. Sachin loves to hone his skills by reading up on new strategies and techniques as well as taking part in industry events. In addition to being a successful entrepreneur, Sachin also takes pleasure in photography - as a hobby.

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