How Position Sizing Can Make or Break You
In trading, the biggest threats are the ones you don’t see coming. Market crashes, black swan events, and overnight gaps are easy scapegoats, but the true silent killer is far more mundane. It doesn’t make headlines or evoke dramatic stories—it just quietly erodes accounts, one oversized trade at a time.
Position sizing isn’t glamorous. It won’t give you the thrill of a perfect entry or the dopamine rush of a 300% return. But it is, without question, the difference between those who survive long enough to thrive and those who blow up before they even understand what happened.
The Illusion of Conviction
Walk into any trading forum, and you’ll find traders who “know” what’s going to happen next. They load up on an idea with unwavering confidence, taking on oversized risk because “this time is different.” In reality, no trade is a sure thing. No signal is foolproof. No edge is invincible.
The traders who last understand that conviction is a dangerous illusion. They manage their capital not based on how strongly they feel about a trade but on how well they can survive being wrong—because they will be, often. And the only way to do that is through disciplined position sizing.
The Numbers Don’t Lie
Let’s break this down with cold, hard math. Suppose you have a $100,000 trading account and decide to risk 10% per trade. If you lose four trades in a row—a fairly normal occurrence—now you’re suddenly down to say $65,610. Recovering from a roughly 35% drawdown requires a 53% return just to break even.
Now consider risking only 2% per trade. The same four losses in a row leave you with $92,160, requiring a far more manageable 8.5% gain to recover. The lesson? When you let one bad streak dictate your survival, the market will eventually collect its toll.
The Edge You Can’t See
Professional traders don’t rely on picking perfect trades. They rely on their edge playing out over time. Even with a solid options strategy that wins most of the time (due to the high-probability approach), you’ll still face long losing streaks. It’s called sequence risk. The only way to ensure those streaks don’t destroy you is to make sure each trade’s risk is small enough to be irrelevant in the grand scheme of your career.
Ed Seykota, one of the greatest systematic traders of all time, put it simply: “If you don’t bet, you can’t win. If you lose all your chips, you can’t bet.” The irony is that most traders think about winning more often than surviving. But those who prioritize survival are the ones who end up winning over time.
A Practical Framework for Position Sizing
So, what’s the ideal position size? It depends on your strategy, but the golden rule remains the same: risk small enough that no single trade can materially hurt you. Here’s a simple framework:
- Define Your Maximum Risk Tolerance: Establish a reasonable risk-per-trade threshold, ensuring no single loss is devastating.
- Scale Positions to Market Structure: Adjust position sizes based on key technical levels, support/resistance, or price action to avoid overexposure in volatile conditions.
- Diversify Trade Types: Allocate capital across different strategies or asset classes to reduce correlation and mitigate concentrated risk.
The Hardest Thing to Do is Nothing
One of the most painful lessons in trading is learning to sit on your hands. When you see a juicy setup, you’ll be tempted to go bigger than usual. But the market has an uncanny ability to punish greed just when it feels most justified.
Good trading isn’t about making money fast. It’s about staying in the game long enough to let your edge compound. The traders who survive aren’t the ones who take the biggest swings—they’re the ones who manage risk so well that their capital is always there to fight another day.
Position sizing isn’t just a risk-management technique—it’s the lifeblood of longevity. And in a game where time is your greatest asset, ensuring you’re around to see another trade is the most valuable edge of all.
I’ve been trading options professionally for 20+ years, and if there’s one thing experience has taught me, it’s this: success isn’t about chasing moonshots—it’s about discipline, probabilities, and consistency.
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Probabilities over predictions,
— Andy Crowder
