When I first started with trading more than a decade ago, I thought trading success was about being right – knowing when to enter the market and milk some money out of it quickly.

Pretty soon the markets taught me that this was not the right path to follow!

I slowly started shifting my mindset from being right to simple probabilities: I wasn’t concerned about being right or wrong anymore, but rather about how much I lost when the trade didn’t work and how much I made when the trade was profitable.

But 3 years ago, when I started designing the top-notch trading algos we’re now using in our hedge fund, I wanted to go even further, so I turned my attention to an even higher level of risk management – based on the question:

What is the right position of my trade at any given moment?

Initially, we developed a special testing platform with the head programmer in my hedge fund and started testing an endless number of ideas to find new techniques for position sizing. The idea was simple – the higher the chance that the current market conditions were in our favor, the greater % of our capital we should risk (the more futures contracts we should trade), and vice versa.

'The higher the chance that the current market conditions were in our favor, the greater we should risk.' Click To Tweet

We had quite a lot of fun testing all of our ideas and some of them were really pretty cool (yet pretty simple). Eventually, the testing led us to an even bigger idea we used to build our proprietary position sizing “brain” we called “Trading Director”, but even if you’re not at the phase of building your own hedge fund (yet), there are still plenty of simple ways you can use this approach and start testing advanced position sizing techniques.

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Here a few simple ones you can test today:

  1. The day of the week matters – Some days of the week have much stronger results than others, therefore, you can adjust your position size accordingly: On some days of the week you can increase your position by 25, 50 or even 100% (and on some days you should decrease the position size too).
  2. The previous day’s action often helps – The way the market traded on the previous day often matters. Just analyze what your trades look like when the previous day was an up day, when it was a down day, when it was a low-volatility day and when it was a high-volatility day. The previous day’s action can be correlated with the quality of your entries, therefore, you have another great opportunity to set the size of your position accordingly. 'The previous day’s market action can often be correlated with the quality of your entries.' Click To Tweet
  3. An opening gap can make a lot of difference – In some markets, a large gap can mean that there might not be enough space for a further movement in the gap’s direction, therefore, analyzing whether the current trading day opened with a gap, in which direction, and in what size, can be another effective way to determine a more appropriate position size for the given day.

Of course, there are many more techniques to explore, but these 3 are pretty good and are safe to start with. The more you experiment with different position sizing methods, under different market setups and conditions, the more interesting the results.

And if you really want to get advanced with this concept (which I highly recommend), then one of the best ways is to use Market Internals to analyse market conditions. This is one of the techniques we’re using in our hedge fund and this is also where you can start seeing some really fascinating possibilities.

Happy trading and happy position sizing!

Tomas and Andrew


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DISCLAIMER: Trading involves significant risk of loss and is not suitable for everyone. People can and do lose money. Hypothetical results have many inherent limitations. Past performance is not necessarily indicative of future results.

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