Most of the time, this is not the case for new traders. Money creates emotions. If  you increase your size too much, it becomes difficult to control and manage your emotions.

Emotions will be in your trading no matter what. Succesful trading requires not the elimination of emotions, but management.

If any of these signs sound familiar, you need to start reducing your trading position size:

You Focus on Your PNL All the Time

You chase PNL, it runs. This is one of the most common errors a new trader makes: They constantly pay attention to how much they are up or down in a trade.

This causes poor decision-making because you’re making decisions based on your PNL instead of the market trend.

Pro tip: Hide your unrealized PNL on a trade. This will help keep your focus on what matters: The charts.

You Cannot Leave the Computer

A trade shouldn’t chain you to your computer to your phone. You should be able to comfortably leave for a minute or two without panicking. If you feel too scared to leave a position unwatched for a few minutes, you’re trading too large.

You Take Profits Too Soon

That’s my mortgage. That’s my car payment. That’s a week’s worth of groceries.

When you assign value to unrealized gains in the markets, it can cause you to take profits when you shouldn’t. While this is effective for curtailing greed, in the long run, early profit-taking has disastrous consequences for your long-term PNL. Learn to find that “sweet spot” with your position sizing:

Take profits based on price action, not what the unrealized gain is.

You Stop Out Prematurely 

Have you stopped out before because you were scared, just to watch the stock reversed on you and go to the moon!

If you’re jumping in and out of positions, it’s because you’re fearful of the money being risked. Cut down your size to eliminate this fear. Pre-define your risk before every trade: Are you truly okay with losing $200? If that makes you nervous, lower that number.

Losses Cause You to Adjust Spending Habits

Only risk what you can afford to lose. A trading loss should not cause you to change what type of fuel you get at the gas station. Or what type of food you buy.

You can only be a successful trader if you trade what you can afford to lose. NEVER trade with money you need to survive on. You will not be able to view the market objectively and let our trades play out.

Anything can happen in a trade. Even a strategy with an 80% win rate has a 20% of losing on any given trade. Trading with money you can afford to lose allows you sit back and view markets objectively.

You’re Afraid to Take a Loss

We’ve seen it happen too many times. Traders freeze up, and the loss gets so big that they cannot bear to realize it. Eventually, usually by force from the broker, the trader is liquidated and realizes a massive loss.

This is the opposite of what can go wrong with stopping out pre-maturely. Stopping out too late. This ties back into trading with money you can afford to lose: What you are risking on a trade shouldn’t make you so emotional that you freeze up.

Struggling with managing your trading positions correctly? We have multiple classes dedicated to this important topic in our 60 Day Live Trading Boot Camp:

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The post 6 Signs You’re Trading Too Much Size appeared first on Bulls on Wall Street.

If you do any of these, you are trading with too much size. Trading with too much size not only makes trading way more stressful than it needs to be, but it costs you money.

Trading too much size affects your ability to see the markets objectively without emotion.

It affects your risk management, resulting in you taking massive losses. Your winners get cut short. You get gray hairs in your 30’s.

Here is how you should size your positions correctly, and what you need to understand about position sizing to become a more consistent and profitable trader:

Position Sizing 101

Before we get into the weeds, let’s start with the basics. Position sizing is simply your system for determining how many shares you buy or short of stock. This graphic shows you how to calculate it:

Your position size is determined by your risk, where you are placing your stop loss and your entry price. Not by a need to make a lot of money. You cannot just buy 500 shares of everything.

Sizing Misconceptions

More shares don’t mean bigger profits. This doesn’t make sense to most newer traders. How does buying or shorting fewer shares make you more money? Doesn’t double your size means doubling your profits?

One of the biggest misconceptions. Trading with too much size is likely to cause you to make a variety of trading errors. Incorrect position sizing causes you to focus on your PNL, and not on what the price action of the market is telling you.

Stopping out prematurely because you are afraid of losing too much money. Getting greedy and take profits too early. Taking huge losses because you freeze up. Stress destroying your health.

Risk Management Deteriorates

When you trade with too much size, you may not cut your loss when you are supposed to. When you are all-in on a trade and it goes against you, realizing the loss is painful. For some traders, it becomes too painful,  and play the avoidance game until it gets too big to ignore.

We talked a lot about risk management in this article. Trading too much size completely screws up your risk vs reward ratio, as it makes your winners smaller and your losers larger. Study this chart carefully

Huge position sizing throws your risk vs reward ratio out of whack. Most traders will take profits way too soon because they have what they perceive to be a large unrealized gain. They get greedy and realize it. Usually, they end making 1/10th of what they could’ve made if they had focused on market signals instead of their PNL.

The Sweet Spot for Sizing

You have to find the sweet spot of trading enough size to make the time you put into trading worthwhile, but small enough that it doesn’t cause you to trade emotionally. You should size according to your account size and your net worth. Less emotional attachment to your positions will make it easier to let your winners ride and cut your losses short. Like this:

Always consider the worst-case scenario. Anything can happen once you are in the trade. Bad news could come out when you are in a position. If the stock tanks fast when you are overleveraged, you could lose everything, and even go into debt with your broker. Your risk needs to be managed aggressively.

SMALLER STRESS-FREE GAINS > STRESSFUL LARGER GAINS IN THE LONG RUN.

Risk What You Can Afford to Lose

A trading loss should not impact the way you live your life financially. Your mortgage should not be on the line. The market is random. There is always a possibility a trade could be a loser. There is no 100% certainty in the markets (or in life).

Don’t risk more than 2% of your account on any one trade when you are a new trader. You need to keep your losses small so you can stay in the game long enough to become consistently profitable.

You cannot let one trading loss bring you all the way back to square one, or cause you to start selling off assets to continue to maintain your current lifestyle. Trading needs to SUPPLEMENTAL income before it can become a primary source of income.

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The post The Art of Position Sizing: Read This Before Your Next Trade appeared first on Bulls on Wall Street.