Mastering This Concept Will Improve Your Trading Success

Managing Editor’s Note: As you’ve no doubt seen, the markets have been haywire this past week. The S&P 500 dropped 7.3% in just three days. And the tech-heavy Nasdaq fell 11.5% over the same time frame.

But amid the carnage, Larry’s paid subscribers have been making gains.

As volatility has picked up, Larry has been able to close out gains of 131.5% by profiting on a falling Nasdaq… 121.4% on Apple’s decline… and 54.4% as Tesla tanked.

So, kudos if you’re a paid-up Larry subscriber who acted on his recommendations. And if you’re not yet a subscriber, stay tuned for more from Larry about how he’s viewing the steep drop in stock prices.

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The most important thing when you’re new to trading is to find a mentor.

That’s what helped me turn the corner from blowing up my account… to becoming the 40-year trading veteran I am today.

And in these pages, it’s a role I hope I can serve for all my readers.

That’s why, today, we’re turning to our mailbag with a question from a subscriber…

Do you have recommendations for position size?

Do you trade the same number of contracts with every trade, or do you increase the position size as you accumulate profit?…

Thank you, I love the service. I’ve placed seven trades with six winners.

– John L.

Thanks for writing in, John. These are great questions to ask when you’re starting off as a trader.

And position sizing is a vital concept to grasp if you want to make money over time as a trader… and avoid gut-wrenching losses.

So, let’s dig in…

Pick a Percentage

If you’ve never heard of position sizing, don’t worry…

It’s the process of determining the number of shares or options contracts to buy or sell in any trade.

And it’s crucial to master.

Proper position sizing helps you maximize your potential for profit while minimizing your potential for loss.

When deciding your position size for trades, the first thing to consider is your account size.

Say you’ve got $100,000 in your brokerage account. But you want to use only $20,000 of that for trading options with one of my services.

Then you’d consider only that $20,000 when determining your position size.

One simple way to decide on a sensible position size is to choose a percentage of your funds.

For instance, you might decide to risk 2–3% of your $20,000 on each trade. So, you’d aim to risk $400–600 for each trade.

Using a percentage means your position sizes grow, in dollar terms, as your trading account grows.

If you’ve been trading a while… and your $20,000 has grown into $30,000… then 2–3% turns into a position size of $600–900 per trade.

And keep in mind, 2–3% doesn’t have to be your chosen percentage.

Some conservative traders may feel better risking just 1% per trade. More experienced traders may want to take on more risk by putting 4–5% into each trade.

And so on.

Just keep in mind that you don’t want to blow up your account.

If you risk 25% of your account on a trade, as an extreme example, it would only take four losing trades to wipe you out

And that’s not the only important concept for position sizing…

Stay Consistent

One trap many rookie traders fall into is inconsistent position sizing.

You may have decided to put $500 into each trade, for instance.

But then you hear about the next great thing – for example, the frenzy around artificial intelligence (AI).

And you risk thousands of dollars betting that AI chipmaker Nvidia (NVDA) will go up.

That will work out great if you’re right. But you risk blowing yourself up if you’re wrong… because your position size is too big.

That’s why I recommend you stick to the same position sizing rules for each trade no matter what.

And there’s one more thing to consider…

Start Small

Maybe you’re just starting out as a trader.

Or maybe you only have a few thousand dollars to set aside for trading.

Then make sure you start small.

Options are one of my favorite ways of making money.

But many people need a little time before they get the hang of options trading.

So, when you’re starting out, consider trading just one options contract per trade.

Get your feet under you. Read more of my essays and special reports. Once you feel like you’re getting a handle on things, you can reevaluate your position sizing.

Even if you’re gaining only $100 per winning trade, that’s OK. That can stack up quickly.

Ultimately, growing your profits slowly over time has proven far more effective than rushing for wealth.

I know because when I was starting out as a trader, I tried to swing for the fences with every trade. And I lost all my capital several times over.

But once I learned to keep my position sizes rational, I went on to have 20 straight winning years as a trader.

So, the next time you’re making a trade, ask yourself whether you’re trading the right position size.

If you’re risking more than 2–3% of your account, stop and rethink your position.

You’ll make less money on winning trades. But you’ll also keep your losses under control.

And that’s critical if you want to make money as a trader over time.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. If you’d like your question addressed in the future, be sure to send it in to [email protected]. I can’t give personalized advice, but I’ll do my best to offer as much trading insight as I can.