Optimise Your Trade Position Size

Before we start, a quick reminder that this is just my opinion. I never give advice, especially when it comes to risk and position sizing. That’s 100% your choice to make. If in doubt don’t risk anything! Ok? ok. 

Right, imagine holding out a piece of string in front of you. Left-hand grabs one end, right grabs the other.

• To the very left is £1 risk per trade
• To the very right is £10 million risk per trade

(Pretty extreme differences but you’ll see why in a moment)

At £1 risk per trade, no one really cares. It’s pretty much a demo account. A quid gets you barely anything these days, there’s no emotion attached to losing or making £1. Move over to the right and unless you are a billionaire (or a government buying a chicken coop…) £10,000,000 is a meaningful amount of money!

If you make or lose that, there’s significant emotion attached to it.

Now imagine you are in a trade with that risk:

The price is moving at a rate of £250k per tick. Do you think you’ll be able to stick to your plan? 4 ticks is a million quid… Emotions will be driving your decisions hard. Hold a trade? No chance!

Now try this. Starting at £10m risk, move down that imaginary string line to a smaller size risk per trade.

How does emotion play a part in your trading?

• £1m risk per trade = Still very emotional
• £100k = Probably still high emotion
• £10k = For most developing traders, yep still emotion
• £1k = We’re closer to a good level here, depending on account size.
• £100 = Maybe emotional if you are trading with a small account
• £10 = Na, probably not. It’s a tenner

At some point on that imaginary line, emotion is removed. You can execute and stick to your trading plan without fighting with an emotional attachment to money. And that level is going to be different for everyone, experience, account size, risk tolerance etc.

But your job is to find your personal tipping point. The exact amount of risk that tips you from

 “Oh I’d be uncomfortable with those P&L swings”

To

“Ok I could handle that and focus on the trade, not the P&L”

Once you find that number that’s your optimum risk per trade (assuming you have edge). Any more risk and emotions kick in, affecting your execution ability. Any less risk and you (arguably) aren’t being efficient with capital. Try it for yourself and work out your true risk tolerance level. Keep it managed!