Sizing is king

big goldfish in a small aquarium, and reverse – outgrown concept

In a discussion platform, a beginner to equity options expressed his keenness to understand the nitty gritties of trading it, to which, another member who had several years of trading experience behind him, expressed amusement, as he felt that there was hardly anything to learn. He elaborated further by saying that all one needed to have was a view, and if it was a positive view, buy call options in a far expiry. In my opinion, there is nothing wrong with this approach, as it is always better to approach markets with less theoretical baggage, and trade purely based on one’s view. But then, this simplistic approach is instrumental to the creation of surprise moves, that keeps the romance intact. I have encountered many a trader who wouldn’t be on the long side, partly because their fear of time decay always forced them to sit out of the directional moves. For them, their intellectual might does not allow them to be found a loser when time decay sets in and would rather forgo an opportunity to partake in profits on the long side. This approach is not devoid of reasons, as the free runs on the long side (CE or PE) don’t happen as often, which underscores the difficulty in bringing the profits home, even after getting the view right. And all this assumes that one gets the view right, but then how often does one get it right? Hence, it is no wonder that, with experience, a trader begins to shift more importance to the aspects that you can control. This is where position sizing comes in.

According to Marie Gulin-Merle, Google’s VP of Global Ads Marketing, “Budget-agile marketers report better marketing performance: 48% of budget-agile marketers say their marketing performance exceeded internal expectations and key performance indicators (KPIs), compared to 33% of marketers who are not budget-agile. Budget agility empowers marketers to stay flexible and reallocate budget to areas of high potential.” “Having the flexibility to engage in planning while leaving room for growth opportunities can yield better business outcomes. Budget agile marketers are 25% more likely than non-agile marketers to report their performance as stronger than industry competitors.”

These insights on Marketing are equally relevant to Financial Markets as both witness intense competition by participants to get ahead. Being agile in financial markets refer to the ability to scale in and out, and to have freedom to incorporate information that strengthens or weakens your original premise of trade and allow yourself to act on it. Bill Lipschutz, known as the sultan of currencies, says this in a conversation with Jack D. Swager, a famous author and trader. “…if the price action fails to confirm my expectations, will I be hugely long? No, I am going to be flat and buying a little bit on the dips. You have to trade at a size such that if you are not exactly right in your timing, you won’t be blown out of your position. My approach is to build to a larger size as the market is going my way. I don’t put on a trade by saying, “My God, this is the level; the market is taking off right from here.”

Not all though can go into the markets, direction agnostic. I have always felt that those who buy CEs harbor an urge to prove themselves right, and those who buy PEs harbour an urge to prove others wrong. Certainly, it is a generalized statement, but yet, stereotyping always helps to take a better stand. So, while your personality has sway on which side (PE or CE) or which approach (sell or buy), all those are trivialized once you go in. Once in, scaling emerges as the single most important thing. One cannot go in always expecting a higher odd for your win. Position sizing seeks to ensure that even on the few trades you get right, you hit the jackpot. Sizing is king. Everything else is just noise.

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