Many books teach techniques on position sizing so that you can control your risk and maximize your profit. They teach very mechanical techniques like constant dollar allocation per trade and adjusting for stock volatility. These are helpful suggestions, but I have a suggestion for traders who lack experience. Your position size is 1 share of stock.
When you are starting out you should only be trading 1 share of stock and you should not trade options. Trade 1 share of stock until you win on 75% of your trades each day for a month. You will make many mistakes along the way and the key is to keep your “tuition” (losses from bad trades) very low. Sounds easy – right?
Unfortunately, this journey is going to take time and when you reach that benchmark you are going to be patient, disciplined and experienced. You will have become proficient at analyzing market conditions and you will know the types of set-ups that work well for you. Along the way there will be plenty of refinements that get you to that 75% win rate. Once you are consistently winning, your position size will be obvious.
Most of you will lose money very gradually while you learn. Some of you will pull the plug because you have been leaking oil and there is no light in sight. That is OK because you will have tried trading and you will still have some of your hard earned money when you end the journey. Some of you will have gradual drawdowns and then the bleeding will stop. Things will start to fall into place and you will start making strides. The timeline is different for everyone and you need to realize that most people will never get there.
If you are not winning on 75% of your trades, your position sizing is not the problem. You need to work on a systematic approach and you need to trade 1 share while you define it.
I know this solution is boring and most of you will not take this advice. You want to make a killing now, not two years from now. This is also the reason that most people who try to trade – fail. Be different, work on your win rate and keep your “tuition” low.