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The most important thing when you’re new to trading is to find a mentor.
That’s what helped me turn the corner from blowing up my account… to becoming the 40-year trading veteran I am today.
And in these pages, it’s a role I hope I can serve for all my readers.
That’s why, today, we’ll look at a question sent in by a member…
Do you have recommendations for position size?
Do you trade the same number of contracts with every trade, or do you increase the position size as you accumulate profit?…
Thank you, I love the service. I’ve placed seven trades with six winners.
– John L.
These are great questions to ask when you’re starting off as a trader.
Position sizing is a vital concept to grasp if you want to make money over time as a trader… and avoid gut-wrenching losses.
So, let’s dig in…
Pick a Percentage
Position sizing is the process of determining the number of shares or options contracts to buy or sell in any trade. And it’s crucial to master.
Proper position sizing helps you maximize your potential for profit while minimizing your potential for loss.
When deciding your position size for trades, the first thing to consider is your account size.
Say you’ve got $100,000 in your brokerage account. But you want to use only $20,000 of that for trading options with one of my services.
Then you’d consider only that $20,000 when determining your position size.
One simple way to decide on a sensible position size is to choose a percentage of your funds.
For instance, you might decide to risk 2-3% of your $20,000 on each trade. So, you’d aim to risk a max of $400-600 for each trade.
Using a percentage means your position sizes grow, in dollar terms, as your trading account grows.
If you’ve been trading a while and your $20,000 has grown into $30,000, then 2-3% turns into a position size of $600-900 per trade.
And keep in mind, 2-3% doesn’t have to be your chosen percentage.
Some conservative traders may feel better risking just 1% per trade. More experienced traders may want to take on more risk by putting 4-5% into each trade. And so on.
Just keep in mind that you don’t want to blow up your account.
If you risk 25% of your account on a trade, as an extreme example, it would only take four losing trades to wipe you out. Even a 10% position size is risky, and it would only take around 10 bad trades to knock you out of the game.
And that’s not the only important concept for position sizing…
Stay Consistent
One trap many rookie traders fall into is inconsistent position sizing.
You may have decided to put $500 into each trade, for instance.
But then you hear about the next great thing – for example, the frenzy around artificial intelligence (AI).
And you risk thousands of dollars betting that AI chipmaker Nvidia (NVDA) will go up.
That will work out great if you’re right. But you risk blowing yourself up if you’re wrong… because your position size is too big.
That’s why I recommend you stick to the same position sizing rules for each trade, no matter how exciting one trade might seem.
And there’s one more thing to consider…
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Start Small
Maybe you’re just starting out as a trader. Or maybe you only have a few thousand dollars to set aside for trading.
Then make sure you start small.
Options are one of my favorite ways of making money. But many people need a little time to get the hang of options trading and fully understand how they work.
So, when you’re new, consider trading just one options contract per trade.
Get your feet under you. Read my essays and special reports, and tune in to Trading With Larry Live on YouTube. Once you feel like you’re getting a handle on things, you can reevaluate your position sizing.
Even if you’re gaining only $100 per winning trade, that’s OK. That can stack up quickly.
Ultimately, growing your profits slowly over time has proven far more effective than rushing for wealth.
I know because when I was starting out as a trader, I tried to swing for the fences with every trade. And I lost all my capital several times over.
But once I learned to keep my position sizes rational, I went on to have 20 straight winning years as a trader.
So, the next time you’re making a trade, ask yourself whether you’re trading the right position size. If you’re risking more than 2-3% of your account, stop and rethink your position.
You’ll make less money on winning trades. But you’ll also keep your losses under control.
And that’s critical if you want to make money as a trader over time.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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