Chapter 7 Position sizing and management

In this chapter …

I explain my views about position sizing and position management, a complex topic that is often simplified too much by the financial junk-food industry.

Even as I set about planning this chapter I knew it would be the most difficult to write, so I need to set some expectations and parameters for what I will cover. It’s not possible for me (or anyone) to write a simple step-by-step, how-to style trading book. The issues around position sizing and management can be complex, with a variety of scenarios, so trying to cover all bases and possibilities is virtually impossible in a book such as this; one could justify a whole book just on this topic. What I will do, though, is explain some core principles, which you will then need to incorporate into your trading. The principles that I espouse on this subject are grounded in the core rules that I set out at the start of part II, and also based on overcoming the psychological failings known to affect traders.

If there is one rule that I would urge over any other, it’s to cut losses quickly. I learned this very early on in my career when I took over a highly volatile trading book of Japanese equity warrants. The timing of this was just a few months into what became the biggest stock market crash for over a generation. Graphs of the Nikkei during this period go nowhere near showing what it was like to trade during this time. Volatility was at times ridiculously high; sentiment ...

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