Position Sizing Limits Risk In Volatility

2021-08-11

At Simpler Trading we enjoy offering insight into how we take trades in this volatile market.

One of the most important aspects of a trade that leads to gains is understanding position sizing.

Essentially the idea is to establish your overall acceptable account risk, and not extend your positions in the market beyond that risk.

Position sizing takes on greater importance when markets spike and fall, then chop like crazy between these drastic shifts on an almost daily basis. Sounds much like this current market for the last year.

Sometimes the market just doesn’t make sense, like when recent technology tickers earnings were solid yet the tickers fell in price.

The market simply shrugged off the positive earnings because the reported number didn’t meet market expectations. Major indexes finished mixed on the earnings news, and traders were easily caught in a bind.

Position sizing helps when market uncertainty is rampant, and trades turn up on the wrong side of expectations.

Here are key elements to consider:

  • New/conservative traders – Don’t risk more than 1 to 2% of an account per trade
  • Intermediate/conservative traders – Don’t risk more than 2.5% of an account per trade
  • Experienced/aggressive traders – Never allocate more than 5% of an account on any one trade
  • Don’t have more than 20% of your account at risk at any given time, which means sitting largely in cash (a strong trading position throughout this pandemic influenced market)
  • Don’t have more positions than you can realistically handle

This market is not likely to settle into a committed direction with much notice and Simpler’s traders are keeping a cautious eye toward any sudden – possibly deep – pullbacks.

We Saw: More rallies into new highs in major indexes —

  • Dow, S&P rally hit new records while Nasdaq stays slightly red
  • Questions, concerns grow over potential market question
  • Space race keeps adding competitors

We’re Watching: Nasdaq wavering… possible signal for decline? —

  • Strong stocks seemingly waffling under market tension
  • What’s ahead with monthly options expirations
  • Setups in: HD, AMAT, TSLA, ZM