The Psychology of Sizing (Guest Blog)

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Below is a wonderful contribution to our learning/growth shared by an SMB Blog Reader and professional


For the past 4 months I’ve been battling with risk management. It’s been my Achilles heel. Its has completely destroyed my consistency. I’ve made big and I’ve also lost big. I’d say that 80% of my trades have good technical structure and fundamental catalysts. However, when I’m oversized and I lose; it tends to wipe out a few of my positive days. I’ve tried many things, from risk management exercises, journaling, and visualization exercises, etc…

However, I’m still struggling with my risk management. My issue is primarily initiating positions with too much size, later freezing due to the large unrealized loss and failing to adhere to my stop.

While I’ve researched several ways to help improve this weakness, I’ve never understood why? Why is it that I automatically type in 1000 shares or 500 shares into my market maker? Is it that I’m greedy? Careless? Is it that I don’t know what I’m doing? Why is it that I automatically jump into these large share lots that are much more than what I’m consciously willing to risk? Over the past four months, I’ve never been able to find a reason why I do this?

This past weekend I saw a psychotherapist, who made a presentation at a weekly weightloss support group I’ve been attending since Jan 1st (Lost 10 lbs – so far!!!). One of the points that struck me the most from the session with the psychotherapist is when she said “no one does anything for the heck of it.” A binge eater does not eat for the sake of eating, a binge drinker does not drink for the sake of another drink, they do so in order to fulfill something. Boredom, depression, a feeling of added value (i.e. biggest drinker or biggest eater is manlier than the rest). I was left with the home work of looking into my past and asking myself, why do I overeat?

Today I asked myself why do I add size beyond my acceptable risk? Why do I go for it? After some introspection I’ve realized the following: When I was small I hit a very memorable home run during my little league game that got my team into the playoffs. It felt great, my parents and my team were all proud of me. When I was in my high school swim team, I disliked the distance event because I felt that it was boring and unpopular, I enjoyed the fast energy/power driven sprints and the mid-distance events. I’ve always leaned towards power driven events and scenarios. I take too much size because it makes me feel great, like I’m in contention to hit another home run, re-live the big win, and be recognized as a great young trader among my peers.

I couldn’t be further from the truth. If taking on size, putting on tons of risk, and automatically hitting 1000 share lots increases my self-worth; then why am I down over $1,000 today, why do I feel horrible after realizing the large loss? The large size does not increase my-self worth; instead it puts me at risk of feeling worse, just like binge eating temporarily makes you feel better, but does not resolve anything. Large size only adds risk; it does not increase the trade’s probability of success. While I may feel like I’m in contention to hit a home run, I’m truly in contention to blow up. Deep down, I know that my trading P&L and trading in general have nothing to do with my self-worth. Yet somehow, I’ve managed to equate large size with the happy memory of winning.

From my psychology studies of Ari Kiev, and Dr. Steenbarger; I realize that the next step is really to acknowledge this occurrence. Rather than fight it and work my hardest to avoid it; the most powerful approach is to simply recognize that this is what I’m doing and that this mindset is flawed. The real way to achieve the home run feeling will come from consistently placing risk managed trades, that with time will equate to a home run month. The nutritional psychotherapist said the same thing: “The most powerful thing one can do is to recognize why and acknowledge it “- within time I will see that while I have the option and the power of adding 1000 to 2000+ shares, I will not be tempted to use it because I consciously understand that trading size does not measure me as a trader.

While I’m down $1,000 today; I’ve taken a powerful step in the right direction.

Please share your thoughts in our comments section about his analysis.

12 Comments on “The Psychology of Sizing (Guest Blog)”

  1. Very nice, self-revealing post. Self-honesty will take you a long way in trading development.

    I’ve always felt that money mgt and position sizing is heavily influenced by one’s psychology.

    Each trader may think they have several “issues”, but upon reflection, those issues can often be traced back to one or maybe two core psych. issue(s). Find out what your core issue is and and how it manifests in your behavior, and then you know to ‘expect’ them to show up….and when they do show up, you’re increased awareness will hopefully prevent you from doing too much damage.

    Andrew Menaker, PhD

  2. You know what makes me sad? YOU DO! Maybe we should chug on over to namby pamby land where MAYBE we could find you some self confidence for you ya jack wagon! Tissue? crybaby……

  3. Good post.
    Im struggeling with kind of the opposite. Im very consistent banking small amounts everyday. But im having a very hard time increasing my risk/size. Really struggeling with this one.
    I guess alot of other traders also are struggeling with this, or have gone through it. I need to find away around it!!

  4. You’re battling with risk management because you don’t have a plan. Stop crying. You might have a ego problem, don’t feel sorry for yourself. Fix your method. It makes no sense.

    1000 shares with 10 cents risk is different from 1000 shares with 50 cents risk. If you take the same size on every trade, how do you stay consistent? Some trades u risk $100, some you risk $500 and you treat them all the same.

    Find a dollar amount you want to risk per trade. If that amount is $100 then for every trade you have to determine where your exit is. If your exit is 25c lower then you use the following formula:

    Risk/Stop loss point = # of shares

    $100/25c = 4 lots of 100 shares

    —–Twading is Simpol—-

    Stop feeling sorry for yourself and fix your method. You gonna lose ur ass off trading the way u are. If you fix your risk management, you can stop going to the therapist or crying to your wife. I dare you to use this risk management and tell me in a month your equity curve hasn’t improved. focus on your risk management and u stand a chance. I could have told u this nicely, but you’d probably thank me and not use it. this way works better. you’re welcome.

  5. Brutal delivery, but the message is worth noting. I adopted this risk management strategy a couple of years back and it has kept me in the game winning or not.

    Van Tharp talks a lot about this subject in his book “Trade Your Way To Financial Freedom”. From memory he had 3 or 4 different position sizing methods of which this was one of them. Another that sounded good was changing your sizing in relation to market volatility. If you’re struggling with this topic I would strongly recommend this book as this topic is what Tharp preaches the most.

    Best of luck 🙂

  6. I feel that simpvol and Pdmoney are pointing out the obvious. Even the most novice of traders understands that risk management is integral to trading, simple share calculations as stated below, and positions size calculations are readily available all over the internet. This part of the equation is a given. As written in the article, the author is a professional trader, one can only assume that as a professional… he/she works at a professional firm and to some degree must be profitable. In addition, he/she quotes having read Dr. Kiev and Dr. Steenbarger’s work notably the two most respectable trading psychologist the industry has ever seen.

    However, what I see is that the question at hand is why do traders consistently repeat their flaws? While this trader may be struggling with his/her position management, other traders struggle with consistently taking the same set up. Others struggle with over-analyzing a trade or not committing enough capital to a trade. The bigger picture here is that under these trading flaws there is a bigger psychological picture. Point out your trading weakness, and I guarantee that there is some sort of psychological issue there.

    Thus far, the most helpful post has come from Dr. Menaker; its all about trading with increased awareness; and catching yourself prior to committing your flaw. Not beating yourself up, staying positive, and coming back the next day with a clean mental slate. Keep up the good work trader, you’re on your way to the major leagues!!!


  7. Awareness, insight, etc is only part of the solution. The key is how you deal with the information you’ve obtained about yourself and how you prevent it from happening again.

  8. Here’s what’s helping me, new trader:

    Read Van Tharp’s “Trade Your Way to Financial Freedom” and Mark Douglas’s “Trading in the Zone.” With emphasis on Douglas’s work.

    Trading is paradoxical — you don’t need to know (and won’t ever 100% of the time know) what happens next to be a proficient trader. Outcomes are random, but edges can provide you a positive expectancy over a large sampling of similar trades, so accept you’re going to lose.

    Also, as already suggested, create a trading plan and test with paper/small size over 50 to 100 trades to derive some level of expectancy. Then plot a Monte Carlo (google it) simulation of your batting average and expectancy over thousands of simulated, random outcome samples. Then plot into an equity curve.

    This should give you a better comprehension that you can win at trading, even when you lose close to half the time. I know it helped me tremendously.

  9. As in most things in trading, the answer is consistency. Do the math and risk a consistent dollar amount per trade and stick to that.

    One of the things that most confuses me about new traders is the constant drive to increase size before you are consistently profitable. Increasing size will increase everything about your results… including the inconsistency.

    If you’re not making consistent money, I can’t say what the right answer is, but I can guarantee sizing up is the WRONG answer. Consistency is all that matters. Size is a tool. Use it wisely and use it to standardize your risk per trade so that your results will be… you got it… more consistent.

  10. Following on from Trader207’s great post and re-reading the original post, I zoned in on the statement “next step is really to acknowledge this occurrence”. I’m not a big fan of the whole deep introspective thing, I tend to think dwelling on the past doesn’t necessarily help your future. It’s clear from your post you’ve already identified the problem you wish to change. It now sounds like simply changing a habit, or forming a new habit to monitor this issue.

    To this end I’ve recently stumbled upon a great site – They say a habit takes 21 days to form a habit. This site will email you every 21 days until you acknowledge every day that you executed the habit you wish to learn. Fail a single day and the 21 cycle starts again.

    Perhaps you could set yourself up a habit here to force you daily to acknowledge whether you considered your trade size and acted accordingly? Best of luck.

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