Q: Van, I recently read one of your books, in it you recommended not risking more than .5% per position if your trading your own funds. In your game that I downloaded I tried only risking .5% of the 10k starting amount per trade but it did not work to well. When I bumped up the amount of risk per trade to a consistent 3 % it worked very well and advanced easily through the levels. Is this because the starting amount of 10k is to small to only risk .5% and get the required growth of 15k within 75 trades? I ask as I have a small 60k plus margin I can trade and I only like to risk .5% or 300 per trade but am concerned at that level my account wont grow fast enough to meet my goals.
Thanks, Tim
A: Hi Tim. Van is in New Zealand so I would like to reply to your question. You already have more insight than most folks into one of the two most important areas for trading success. Congratulations.
In level one of the game, it’s very hard to make 50% in 100 trades with such a very small position size. You do have to bump up the position size to get the necessary return to make it to level II. You would not want to take away the lesson from the game, however, that you simply need to bump your position size up to meet your financial objectives. That would only be true if you thoroughly knew your trading system performance was consistent and strong. Without understanding your system’s performance, bumping up your position size could be a fast route to blowing up your account.
As far as your personal account, we can’t give any direct advice. I can offer some things that you might want to look at though. Do you know how consistent your trading system results are? With more consistent trading results, it’s easier to increase your position size without accepting undo risk. If your R-multiples, however, are all over the place then it’s harder (not impossible) to use position sizing to help you meet your financial objectives.
Have you done any simple modeling in Excel to help you see what kind of results your trading system generates over time and how playing with position sizing makes a difference? If you aren’t very sure about your system’s performance, you are much better off keeping with a very conservative position size.
If you would like some more information about this area, I would recommend Van’s book The Definitive Guide to Position Sizing. It’s basically a textbook filled with position sizing ideas and strategies. Personally, I had no idea what position sizing could do for my own trading results until I read that book. It also changed the way I think about trading systems.
I wish you luck and thank you for your business.
RJ Hixson
P.S. A new version of the position sizing game is still in the works. We hope to release it within the next month.
