A word on position sizing
So... you want to try your hand in trading? Posistion sizing is queen, because it protects your king Cash.
Every year, it starts the same. I place enough winning trades to think that I should change my rules to pick up the pace. Choose a larger position size. Sometimes, it ends up working which further emboldens the next call. Perhaps two go right. Maybe three. At some point… you learn an important and perhaps expensive lesson about why any position size you trade should never be greater than ___X%. As a self-imposed rule, for me, that X figure is 5%. I could be completely wrong in one trade and lose only 5% max. If I monitor that trade appropriately, I should never lose more than 25-50% on that trade, which would mean a 2.5% loss. A 2.5% loss I can take on the chin. A 10% loss, that hurts. And that is exactly what happened last week as I sized up my theory that we were going to head lower after the FOMC and jobs announcement, wherein my belief of “higher for longer” rates was given a lot of support. If the market rallied hard on the hopes of lower rates faster, then the opposite would be true. Nope. The market doesn’t seem to care that much. It said pretty loudly, “We don’t mind higher rates in the short term, we know they are going to be head lower soon enough”. It doesn’t matter March vs. May and that makes sense to me.
The most important strategy you can have with trading is not being right or wrong. It’s about risk management. Knowing when to enter and exit trades so you are at an advantage to succeed is crucial to be sure. However, if you size trades wrong, in the end, it doesn’t matter.
Now…after that PSA announcement, where do I think we’re heading next? I think Tesla is heading lower. I’m sticking in that trade to be sure. But only at my max allowed size this time! META earnings weren’t the big story as much as the massive buyback program and dividend announcement were for that name. Nasdaq is looking more and more like the 2000 era dot.com bust to me in many names. I don’t want to be long the market for a long duration up here. I’m very OK sitting in a 5% guaranteed yield, selling put premium in names that I want to own anyway (Energy, Gold, Food). J Powell was on 60 Minutes on Sunday and he sounds like he does not want to be compared to Arthur Burns by repeating past inflation-era mistakes of the 70’s. Good for him. The market usually leads though and is saying cuts are coming. He’ll have to follow suit, and inflation roars back. The Federal Reserve is trapped. In an election year. I will trade this market on up if the tape says go ahead and buy… I’m not sticking in it long. I like it lower, still.
The trading log is showing a steady 70% win rate on trade ideas. That’s great. Still spanking the SPX benchmark as well, but took a 10% haircut last week because I disregarded one of the most important risk management rules you can have. Sizing positions for long-term success.