Earn Your Size: Lessons in the Good and the Bad
Always earn your size.
Every step of the way, both up and down, you should be sizing based on your system and NOT basing it on your emotions.
For context, watch my video on R’s and compounding if you haven’t already: R Multiple and Compounding
Sizing is one of the most important aspects of trading and the foundation for risk management. As a trader you absolutely need to have a “risk-comes-first” mindset to not only survive, but to also thrive in the long-term. With that understanding in mind, each trader should take inventory of their experience, capital, strategy and their current mentality.
There are a ton of resources out there which go over this exact topic so I just wanted to quickly highlight my own experience in case someone could benefit from it.
In my experience, I’ve compounded my R to both extremes. I’ve been at the highest highs of my career and the lowest lows as well, but there was always a pattern of performance over the 2–3 years I've been trading this system. One such pattern is that I’ve always been exactly where I needed to be at that point in time. I seldom thought of the downside, as in I hardly ever thought that I needed to size down at any point and that is inherently dangerous. I’ve always been of the mindset that I could be doing “more”, I could be leveling up and that I was ready. Even in the face of multiple consistent drawdowns and cumulative errors, I still felt that way.
It’s easy to get overwhelmed with the feeling of making it all back quickly and you probably could. The question is, what cost will you pay for accelerating your progress artificially? You may have gotten that quick recuperation in the moment, but it’s likely insignificant towards your long-term outlook where that capital might be a small proportion of what you aim to make in the markets overall. That overconfidence gained by “making it back quickly” can easily lead you to make the same leaps of logic in the future and incorrectly position yourself for a blowup.
Far better than this, in my opinion, is to accept that you are exactly where you need to be in your trading career and let it chart it’s natural course. I’ve personally encountered the occasional mental slip-up where I sized up and have literally always regretted it. I’ve been punished by the greed enough times throughout the years to realize it’s inefficacy, but more importantly I was always meticulously charting my overall equity curve through excel and was able to visualize the successes and failures. Unquestionably, the times where I took larger drawdowns were because I was not ready in some way, shape or form. In hindsight I can say that a lot of the things I thought I “knew” were sub-optimal or simply ineffective. You can always look back and say, “I can’t believe I didn’t know what I know now”. The problem with this mentality is that you’re not thinking of what ELSE you don’t know. In other words, you didn’t know what you didn’t know then and you probably don’t know what you don’t know now, you know? Shakespeare couldn’t have said it any better I’m sure. If, in this life, we’re just a blip on the radar of time and history, then you’re also just a blip on your career’s hopeful trajectory. If you’re a beginner then trader small… your “friends” on twitter aren’t going to bail you out when you lose it all trying compare yourself to them. If you’re an intermediate trader then don’t look at someone making multiples on your money within the same ticker and feel inadequate. Let’s be honest with ourselves and recognize where we are truthfully and respect the journey itself, because if we did then we wouldn’t be concerned with anyone other than ourselves. This is a journey of SELF, no one shares your experiences, your capital, your emotions and your beliefs 100%.
Here’s the one recurring truth that I think is so important: Whenever I was sized down and legitimately grinded my way back out of that rut one trade at a time, I was a MUCH better trader for it and the PNL reflected those changes. Not only was I able to break to new highs, I was also impacted by all the rules, the lessons and the optimizations that I worked into my process moving forward. This has SUCH a massive affect on your overall performance because it almost guarantees that whenever you’re sized up it’s when you’re at your BEST. This means your chances to fully inherit the benefits of being your best trader at that point in time are exponentially greater than when you were insecure and unsuccessful.
Pictured below is my equity curve this year where I went through the multiple drawdowns and mistakes where each dot represents a week of time elapsed:
Equity Curve
Take note that each successive drawdown became less and less dramatic and more controlled, whereas each successive peak resembles a parabolic breakout. Just imagine if I chose to double my size or something irresponsible before any big pullback, weeks or months of work could be completely thrown out the window. Emotionally that is going to significantly impact any trader to the point where they make more mistakes than usual and that is incredibly stressful. I also only recently started to adjust my compound to a more aggressive %, so in recent times it’s been more of a pull than in the past but totally under control. It’s a work in progress and I’ll definitely update as time goes on, I can only vouch for the fact that this method kept me out of trouble when I was performing poorly or the market was difficult for my strategy and also helped me realize opportunities afforded to me in a big way.
Lastly, I don’t think it’s wrong to size up when you’re feeling truly confident and your results speak volumes but I think there’s a way to do it that won’t jeopardize everything you’ve worked for and it is to simply adjust the rate at which you compound. By increasing your avg risk by a % or two, you’re really going to be growing at a significantly faster rate than before and that can help you reach your intended risk profile. I would say that the best way to do this is to have a goal in mind for where you want your R to be and then cap it off until you understand for certain that you can handle the risk emotionally. Beware of your greed and remember how and why you got to that point, it’ll help you put it into perspective. Find your threshold.
If there’s one thing I can impart on you here, I’d like you to take your R value extremely seriously and accept when you’re at your lows. It’s so much better to have been sized down when you’re not at your best and be able to make mistake after mistake with less impetus than if you decidedly sized up in retaliation and ruin your entire career due to emotions. The process will always take precedence over your beliefs about who you are or what you are capable of and to have trust in that system will greatly benefit you as a trader.
Sincerely,
