Wanna Trade Big? How and When to Increase Your Position Size

Maximize your trading effectiveness by knowing when and how to vary position sizes--without skipping sound risk management.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Big dog, little dog: Trading larger position sizes while considering risk management
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For the average retail trader, learning to scale up your position size can be a nerve-wracking process that can lead to unexpected and outsized losses. Fortunately, there are some guidelines that may help smooth your progress if you are considering scaling your position size.

Don’t Increase Size Before It’s Time

One mistake traders make when attempting to increase their positon size is rushing the process. Unprofitable traders often think they’re ineffective because they aren’t trading large enough size. Conversely, some profitable traders think they’re leaving money on the table by trading too small.

Either perspective can be dangerous. And that kind of mindset ignores a primary consideration for determining position size: risk management.

Perhaps the best time to create a quantifiable, risk-focused trading methodology may be when you're trading small. It’s also the time to test out different trading styles and techniques and incorporate them into a strategy that is designed to protect your downside and help maximize your upside.

Only once you are comfortable with your strategy—and feel your objectives are defined—you might consider increasing your position size.

Reverse Engineer Your Position Size

You might start by deciding what your maximum risk per trade will be. This is a highly personal decision, but many traders set their max between 1% and 5% of their total account equity.

So if you have a $100,000 account and you’ve determined that you’ll risk 2.5% per trade, your per-trade max risk would be $2,500. Suppose your account balance eventually doubled to $200,000. At that point, keeping a constant per-trade risk of 2.5% would equate to $5,000 (double what it was before).

The potential advantage is that by keeping your risk percentage constant, your position size can rise and fall with your account balance. It’s one way to size up your positions that is also objective and non-emotional.

The same logic holds on the downside as well. For example, suppose your trading account dropped to $50,000. Keeping to a constant 2.5% maximum risk per trade would lower your risk target as well, to $1,250. This automatically heeds the advice of many seasoned traders: when losing, trade smaller.

Remember: there’s no need to rush into trading larger positions. The market will be there when you’re ready. First, your goal should be to refine your trading as much as possible so you can be effective over the long term. If you focus on that, and manage your risk, you’ll have plenty of time to increase your position size in a way that makes sense.


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