Tuesday, June 7, 2011

A Different take on Position Sizing

I have noticed there is a repeating journey, an experimental trail that I have taken as a new trader. The beginning always consists of oblivious innocence. A discretionary, "shot in the dark" with no knowledge of how complicated/risky the endeavor is. This is the first extreme. The second stage consists of a flurry of reading; Somehow I muster rules or a mechanical algorithm that eliminates my emotions out of the process completely. This is the other extreme. Finally, I go back towards the middle, between the spectrum of rules based and discretionary trading.

Don't get me wrong. Position sizing is there to help you. It stops you from risking too much and saves your capital during unavoidable "unlucky streaks" and drawdowns. I was first introduced to Dr. Van K. Tharp's methodology and have stuck with it. There really are a ton of other mechanical ways, though. (As you can tell, I still run into new reading material - See Ralph Vance, Ryan Jones, Tushar Chande, Nauzar Balsara, etc.)

I'd like to propose an alternative view. I'm just starting to read about people who use a discretionary style metric to partially accomplish this task. An objective filter. Does position sizing have to be mechanical based?

Just like "mental stops" is there a way to have a "mental position sizing" mechanism? I do not scale in/out of my trades, but it would be interesting to see if position sizing could be the dominant assessment point of that process.

Of course, somehow the risk assessment would have to be separated from all the behavioral biases and emotions that can overcome a trader. Let me work on it. Maybe there is a next stage? But this is what I've got figured out so far.....

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