Position Sizing: Finding Your MAX Pain

Position Sizing(P.S.) is a very important part in trading survival. Improper P.S. can lead to overtrading, taking tiny profits while letting losing trades run against you and turn into huge losses. In short, if not done well enough to fit your level of comfort it will lead to EMOTIONAL TRADING. Which is the single most biggest enemy to a trader.

In my opinion, P.S. is where trading becomes an art. Every trader has their own level of comfort and pain. If i am managing a portfolio worth $100,000 and i take a $5000 loss on a trade, then i will get emotional and start to notice changes in my behavior in front of my computer screen. I will start to curse, sweat from my forehead a little, pace around the room or start to desperately scan thru my stocks to find the next trade that's gonna 'get me out' of this loss. lol! Never 'gets us out' does it??!!
If anything, that loss will likely get bigger.

Position sizing is about treating every SINGLE trade on it's own merit and you MUST have a MAX pain stop loss in mind before that trade is executed(and always have a profit target). Having said that, my max pain loss is different then yours. EVERYBODY's MAX PAIN IS DIFFERENT!!!! Also, my max pain stop loss is different when i am in a winning streak(my max pain stop loss tends to increase after a nice winning streak) and vice versa in a losing streak(i tend to be very chicken and cut losses very quickly when i am trading like shit).
TRADING IS AN ART! Not a science in my opinion.

The key is to figure out a number, a stop loss figure, that once it gets hit, you'll admit you are wrong, sell the position and move on to the next trade without affecting your emotional state of mind. If you feel emotional after that loss, then you have likely crossed your MAX LOSS PAIN you are now trading on desperation to recoup that loss and you are trading to get even rather then focusing on nailing the next trade and placing that ONE TRADE that's making your mouth water.

During winning streaks where my mind is at ease, i am seeing moves in "3D" and i am executing trades when i am in "the zone" and i am moving from one winning trade to another with flawless execution then i will tend to get very aggressive with my position sizing as the market is likely VIBING WITH MY STYLE (I am trading in my comfort zone) and i can put up to half my account in a DAY TRADE. My comfort zone is a momentum market, a runaway market which is setting up Holy Grail Setups, Wedges/Flags patterns and volume is rampant and stocks are closing on their highs/lows on heavy volume.

I like to think of myself as a disciplined trader: when i am not vibing with the market and i am making bad market calls or choosing poor stock selection to maximize the current market's behavior then i will stop trading all together. When i do place the trade, i will test out tiny positions to see if i am "seeing em right." If not, then i will go on trading probation and hibernate until the tides turn back in my favor.

Personally, my MAX PAIN on any position is $2000. I rarely put more than $200,000 in a stock idea. I usually average between $100,000 to $150,000 on any single day trade, AVERAGE $125,000. So MAX LOSS of $2000 and an average of $125,000 in a single trade, you do the math. I can eat a $2000 loss and move on in a non-emotional state of mind to hunt down the next winning trade.
Obviously i am shooting to be down as little as possible. This is where THE IMPATIENT TRADER in me comes in. I know that winning trades work almost right away. A trade that is fighting me early on or is not moving within 10 minutes after my entry will likely NOT WORK and TURN INTO A LOSER! I repeat, your style and your max pain will be different! I CANNOT STRESS THAT ENOUGH. You need to find your comfort zone.

I am mostly a day trader but i do Overnight Holds on some trades. Depending on my confidence level, the size of this trade will vary greatly. Can go from 500 shares to 10,000 shares. This Is Where Trading IS an ART. Getting a feel for your trading will require you to TRADE and finding out what kind of trader you are, what is your MAX PAIN, what kind of market condition will make your mouth water. Trade only when you are thinking rationally, not emotionally.

Good luck.