Position Sizing
Today I’m going to run through position sizing but first I wanted to quickly recap what happened in the market today.
Jerome Powell spoke for a bit earlier and the big three points he made were:
- Recent data is telling him that the economy has not changed much since September
- Growth is better than expected
- The labor market is weak and justified their recent rate cut
- QT is ending
Recent data showing little change since September suggests the Fed believes the economy is holding steady. This implies that the current policy stance is working as intended and keeping inflation contained while also maintaining a reasonable pace of economic activity. Sounds like more rate cuts are coming, not that this was ever in question for me. Powell also said that growth is better than expected and reflects continued economic strength driven by strong consumer spending and business investment. Despite higher rates, the economy hasn’t lost much momentum as many anticipated. Regarding labor, he mentioned the job market has weakened quite a bit and it’s the key reason behind their decision to lower rates. Hiring has slowed significantly, wage growth is cooling, and job openings are coming down.
The biggest comment of the day was Powell confirming that quantitative tightening (QT) is coming to an end. This means the Fed will soon stop shrinking its balance sheet which typically boosts financial markets. It’s another sign that the Fed is preparing for a more neutral and supportive policy stance heading into next year. Don’t forget, Powell is out come May 2026. At that point, Trump will appoint the next Fed chair who will very likely have a mandate to aggressively lower rates.
On the Trump and China front, things were relatively quiet. Trump said he and Xi have a great relationship but things just get tense sometimes. Ya don’t say. Towards the close, Trump put out a threat to China that the U.S. would no longer buy cooking oil from China if China stops buying our soybeans.
The price action over the last week is a major shift from what we’ve seen over the past five to six months. For a while headlines barely moved the market and everything just grinded higher in a steady trend. Now every piece of news seems to swing price action, whiplash esque. It’s very similar to what we saw in April, just not as extreme… yet. This is something to take notice of. It feels like we’re in a place now where until we get some sort of positive development with China any headline can drop the market quickly. There’s definitely some fragility showing again.
That leads me into the crux of this post, something many of you have asked me to touch on.
Position sizing.
I see so many traders struggle with position sizing and for good reason. It’s hard.
Position sizing is simply how much of your account you put into a trade. It determines how much you win or lose when a stock moves in either direction. If you put 10% of your account into a stock and it drops 5%, you’re down 0.5% overall. Not bad. If you go heavier, say 25%, and that same stock drops 5%, now you’re down 1.25% on your total account. You get the point, the more capital you put into an idea the higher the risk. That’s why sizing matters so much. You only want to go “big” into your highest conviction ideas with the best environment, setup, narratives, etc. and you want to go smaller in everything else.
Your position size should be based on how much you’re comfortable losing on a trade, not how much you think you could make. Always think risk first. “If this trade goes against me, how much can/will I lose? Am I comfortable with that?” Those are the first things I think of when I take a trade. What’s crazy is you can have a win rate of 70% or more but if your wins are smaller than your losses, you will still be a net losing trader. Five small wins likely can’t make up for two or three big losses.