Trade Small

This note includes the following topics:

  • Trade Small
  • Impact of Position Sizing

Trade Small

  • Every casino has table limits.
  • Despite the casino having an EDGE, when a wealthy guy places a billion-dollar bet on a roulette spin
    • He has a ~50% chance of making the casino go bankrupt.
  • Risking too much on any trade will sooner or later blow up your account.
  • Trading too big can turn an EDGE into a losing one.
  • Minimize the ‘tuition paid’ to learn a new strategy.

If you lose all your chips, you CANNOT bet anymore!

Trading account: $10,000
Risk per trade: $500 (5%)

## Simulation: 10 losing streaks
Loss: 10 x $500 = $5,000 == 50%

## Break even after a 50% loss
$5,000 --> $10,000 requires a $5,000 (100% gain) 

Impact of a drawdown

Drawdown breakeven

Impact of Position Sizing

  • Helps reduce your position size during a losing streak
    • After a losing streak, your account size will shrink inevitably.
    • A position sizing algorithm will instruct you to reduce your bet size respectively.
  • Avoids the gambler’s fallacy
    • After a losing streak, a gambler assumes the next bet to be a winner. Hence increasing their position size.
    • Reality: A new coin flip(nth flip) is INDEPENDENT of the previous flip(n-1 flip).

position sizing

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