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Size Really DOES Matter

Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: June 15th, 2007 at 8:16 am EST
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Today I want to share with you a recent trading experience a friend of mine had, and hope this will help you learn about the importance of position sizing. The final result was not positive for him and his trading account, yet I’m hopeful that we can all understand how a more disciplined approach will allow us to stay with trades longer and eliminate the psychological backfire that accompanies trading…

This example is recent, just this past week. I had a good feeling going into the expiration period. For reference, I like to trade the expiration week, as I’ve made some strong gains in a few days. Sunday/Monday I studied and researched extensively and had a great list to work with. I was determined to make good money by Friday’s closing bell. Midday Monday, I had narrowed my choices to a few names…Mastercard was the big name to play, 145 calls were my choice. The stock was rolling early and backed off. Time to strike! However, I had lacked a goal, a position size goal. I knew I would make money on this strike, so I didn’t give it a thought…bad move. I do not normally go through a trade without such a plan in place…for some reason I had a myopic moment. No problem, right? Let’s establish a position and see it work. I got in some calls at 2.2, feeling good as it was near the low pf the day. The market started faltering, and Mastercard dropped. I jumped in for more calls. The market dropped more, and so did Mastercard. I bought MORE calls…and it became a very large position for me. By days end, the stock was sitting just above 141, and my calls were sitting at 1.05….my avg cost was 1.92. Not a fun start to the week, was it? Suffice to say, with all that on the table…Monday was a restless night of sleep. Three bucks outta the money, only four days left? The next day, I saw the stock start to rise a bit in the am…relieved, of course…that I may actually NOT lose the entire amount of the trade. At this point, I was willing to let go at slightly higher prices, book the loss and move on…because I probably made the wrong call initially. So there we go, fire away and dump the calls…preserve capital, because it became a bad trade..overnight. I was done with Mastercard for the week. As you can plainly see, Mastercard went up another 17 points to end the week at 158. The 145 calls which I had at 1.92 finished at 13, or a 577% gain in about four days.

What went wrong here besides getting heavy in size? First thing, the great idea I had on Sunday when doing my research was STILL a great idea when I sold my calls….but I closed the trade, right? How could this be? I let my fear get in the way of staying with a potential winning trade. The fear was stoked by the worry of having TOO much money on the table….not spreading out capital in manageable pieces. I was clearly uncomfortable having the large exposure, something I did not think about when entering the trade. No excuses, but we are always thinking of different things during the trading day….in this case, I saw a potential homerun play and overloaded it with capital. Thinking back, had I even put HALF the amount on the table I would have easily stayed with part of the trade at least until Thursday, perhaps early Friday…for a substantial winner.

I have been trading for many years and have probably made every mistake possible. I’m sure many of you have made mistakes of judgment, too. Show me a successful trader who claims to have never made an error then I’ll show you he’s lying. We’re all human and react in kind to our emotions. We try to keep them in check but there are times we are overwhelmed. We are not machines and while we try our best to approach trading from a systematic perspective, our ‘thoughts’ still get in the way. Proper sizing is a way to control the emotions and allow your best ideas to flourish in a tough trading environment. Your account will thank you in the long run!

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