Imagine being right about the market direction most of the time, but still losing all your money. This might sound surprising, but it's a harsh reality that many traders face due to poor position sizing.
Position sizing refers to the amount of capital you deploy on a single trade. It's a crucial aspect of risk management that can make or break your trading career. Even if you're right about the market direction 60% of the time, poorly sized positions can lead to significant losses.
Veteran trader Tom Basso, one of the original 'Market Wizards,' learned this lesson the hard way. He initially followed a simple rule of risking the same percentage of equity on every trade. However, after experiencing a highly volatile silver trade, he realized that risk is not just about the amount of money that can be lost, but also how fast prices move.
Basso's experience led him to add a second filter to his risk management strategy - volatility. He started calculating both risk as a percentage of equity and volatility as a percentage of equity, and then used the smaller of the two to size his positions. Additionally, he factored in margin considerations to ensure his portfolio didn't become overexposed.
The key takeaway from Basso's experience is that survival in the markets depends as much on how much you bet as on getting the trade right. By combining these risk management strategies, traders can automatically reduce exposure during volatile phases, guard against margin stress, and keep overall portfolio risk under control.
Remember, this is perspective, not prediction. Do your own research and consider your own risk tolerance before making any investment decisions.
Download the TradeKaizen app to practice F&O trading with real-time market data anytime, anywhere.
Get it on Google PlayConnect with fellow traders, share strategies, and improve your trading skills in our Telegram group.
Join Telegram