Trading Too Big Positions

To be a good trader, it’s important to recognise why some traders fail. A reason why traders fail is because they take on positions that are too big relative to the capital that they have. By trading bigger than they should, traders run the risk of losing all their capital and losing the chance to let their investment process work. Vee and Nic discuss how they recognise when they are trading too big and how they ensure their positions are properly sized.


Hi guys, welcome to another episode of our series, “Habits of a Losing Trader.” Today, we’re going to talk about holding positions that are too big. I’m Nicholas, and with me today is my co-host, Vee. We can’t stress enough how important it is to address these habits of losing traders. One of the things I’ve noticed, especially among those starting out, is that they tend to hold positions that are too big relative to their capital size. This means they invest too much in a particular trade or even a particular idea, which results in a number of trades that are very similar. For example, if you are bullish on dollars, you might find yourself buying Dollar against the Yen, Dollar against the Euro, Dollar against the Aussie dollar, and so on. While this can feel good when it’s going the right way, market outcomes are very random in the short run, and you can get wiped out or suffer almost irreparable damage to your capital base and even your psychology – your mindset – when you suffer huge losses.

This is particularly tricky emotionally. The way to handle this is to understand that your trades should be sized according to how much capital you’re willing to risk. Most people begin by thinking about how much money they can make, rather than how much they can afford to lose. You should always think about how much you’re willing to lose for each trade. This way, you always know what your worst-case scenarios are. Then you can start to think about the scenarios where it works out well for you. In my years of trading, I can tell you this: anything that can go wrong eventually will go wrong at some point. So, you cannot risk everything you have on one trade, no matter how great the opportunity seems. This problem is made worse by the fact that we have many movies and stories about trading where someone risks everything on one great trade, and it works out. But they don’t make movies about the 999,999 other guys who didn’t make it.

It’s important to size your trades according to your capital base. If you are new to trading, it’s always better to err on the side of having too little risk than too much. Then scale up as you learn and grow. For example, if you are a short-term trader, maybe risk only one to two percent of your capital for each trade. If you are a longer-term trader, maybe even up to five percent. This way, you will not be wiped out on any single day by bad outcomes. Understand that no trade looks great forever, and they often look the best at the peak of mania. You have to remember that there are many instances where a trade seems perfect, but often, these opportunities do come around again in different markets. So, you don’t need to build Rome in one day, but you can destroy it in one day. It’s very important not to risk everything you have on a few trades that are very highly correlated at any point in time.

Remember that if you have a hundred dollars and lose 50% of it, you’re left with fifty dollars. To get back to where you were, which is $100, the market needs to move 100%, not just 50%. It’s always important to understand that the losses you make by taking too much risk make it very difficult to get back to where you were. This leads many traders down the path of financial ruin, as they feel the need to double down and take even more risks to get back to break-even. The ideal investment process is to allocate your capital to your trades on a very objective basis consistently. My rule of thumb to overcome this habit is to have an initial trading size that makes sense for every trade that comes along and meets your criteria. For instance, if it’s an ‘A’ trade or a ‘B’ trade, allocate the same size initially and then adjust as the market performs.

The initial size should be consistent so that you’re making decisions based on data rather than emotions. When going through a bad streak, don’t trade with bigger sizes; instead, trade with smaller sizes until performance starts to trend in the right direction. Then, resume trading with your initial standard sizing. When performance is better and markets move in your direction, scale up a little bit, but not by a lot. Today, we’ve discussed the habit of losing traders, which is that they tend to trade too big relative to their capital size. If you want to be successful as a trader in the long run, be consistently profitable, and increase your wealth, you need to address this problem of trading too big relative to your capital size. Thanks, Nick, very much for your time, and we’ll talk more about this in the days to come. Alright.