I love to see new readers coming onboard. At least, I think the question below reflects a new reader’s unfamiliarity with what I do here.
Maybe it’s me, but the interview I read [my column] simply talked about risk management, but did not really explain what position size is, or for that matter exactly how to define risk in dollars, both with and without the use of net margin requirements. Maybe I’m missing something. Please explain.
No, my friend, you are not missing a thing. It is I who answered generally, and I do so because the scope of what I do here is general in nature. I am not an analyst, per se, at least not a technical one, and I shy away from giving specific trading advice or predicting specific market outcomes. As well, as you noticed in my answer to the reader’s question, I try to get to the heart of the issue without “cluttering up the page.” To refresh your memory, the question you reference related specifically to a strategy Dr. Tharp (a contributor on this site) espouses. Below is my sentence telling the reader how I will answer his question.
I have not read Dr.Tharp’s book, so I have no comment on what his strategy espouses, but I do have a comment on the general principle involved.
And so I did offer commentary on the general principle of position size in the answer below …
Position size is an integral part of any strategy, as it can mitigate the ancillary costs of trading. I have no idea what you are trading, how you are trading, or what your risks are, but I can tell you that you should be considering position size in every trade you make. And you should base your consideration of position size on your risk management rules, meaning you should define position size based on what you can afford to lose on any one trade.
The bold phrase above is the reason for my generality. I often know little about those who write in to ask me questions, so I try to get to the heart of their issue in the most direct way possible, as I try to keep my column succinct and to the point, which means I cannot explore every aspect of every question, or every answer, for that matter. This is the reason I did not develop my answer more fully.
From time to time, though, I will get specific, if the question is such that I can go “deep” without creating confusion or disjointed thoughts. If you hang around, you will see this from time to time.
I hope my explanation is what you were seeking, but, if not, write in again with a specific question, and I will try to be as specific as my own guidelines permit. Thanks for writing in …
Trade in the day; invest in your life …
