Risk Management & Position Sizing

3 Trading Rules I Wish I’d Taken Seriously Sooner.

Some of the biggest improvements in my trading came from ideas I already knew, but wasn’t consistently putting into practice.

1. Cutting losses short and letting winners run. Actually doing it.

Everyone knows the mantra. Following it means accepting when you’re wrong, taking the loss, and giving your winners a chance to become meaningful.

Knowing the rule doesn’t protect your account. Following it does.

2. Position sizing.

Arguably the most important of the three, and often one of the last things traders learn.

Your position size and the distance to your stop determine how much you’re planning to risk. A good setup can still be a bad trade for your account if you size it too large.

3. Progressive exposure.

When my trades are working, I build on that success: more qualifying setups, larger positions, and gradually more account exposure.

When things stop working, I reverse that process. Smaller positions. Fewer new trades. Less exposure.

Sometimes I pause new buys and manage the positions that are still working. Sometimes I move to cash.

My results help determine how aggressive I get. The standards for taking a trade stay the same.

The personal bonus: protecting break-even helps me hold winners.

This is something I picked up from Mark Minervini, and it fits my personality.

Once a trade has made meaningful progress, I may sell some into strength and raise my stop to break-even. Or I may keep the original stop and take enough profit to cover the planned risk on the remaining shares.

The aim is to protect the overall trade around break-even or better at my planned exit, while leaving room for a larger move.

Taking partial profits can reduce my eventual gain. I accept that trade-off because reducing the original downside helps me stay patient with the remaining position.

It also helps me stay willing to take the next qualifying setup when my results justify adding exposure.

I screen for characteristics shared by some of the biggest winners in history. That gives me a process for choosing candidates. It still doesn’t tell me which one will become the big winner.

Some will fail. Some will go nowhere. Others may run much further than I expected.

That’s why Minervini’s approach resonates with me: taking some profit to help finance the remaining risk makes it easier for me to give a winner time.

Know yourself well enough to build a process you can actually follow.

Larry Hite put it perfectly in Market Wizards:

“If you don’t bet, you can’t win. … If you lose all your chips, you can’t bet.”

You Might Trade Better If You Cared a Little Less.

A lot of new traders turn every pullback into a personal emergency. They refresh their account, chase explanations, and second-guess a plan they were comfortable with yesterday. All that worrying can create more bad decisions than the pullback itself.

In Market Wizards, Brian Gelber identified this lesson: “The realization that when you don’t care, you do well, and when you try too hard, you don’t do well.” He was discussing the temptation to force trades when good opportunities weren’t there.

One of the biggest differences between a new trader and an experienced trader is perspective. Trading through periods like the 2008 financial crisis, the panic in early 2020, and the 2022 bear market can change how you respond to uncertainty. You’ve seen frightening headlines, sharp declines, and recoveries. An ordinary pullback starts looking like something you can handle.

Brett Steenbarger captures that in The Daily Trading Coach: “Confidence doesn’t come from being right all the time; it comes from surviving the many occasions of being wrong.”

But you don’t need 20 years of scars to start learning from people who already have them.

If every normal fluctuation rattles you, examine what’s underneath.

• Are your positions too large?

• Do you understand your strategy?

• Do you have sell rules, and can you accept the potential loss?

• Do you understand probability?

Bruce Kovner warned that novice traders often trade far too big. Larry Hite explained how controlling risk helped him stay composed: “By only risking 1 percent, I am indifferent to any individual trade.” That was his account risk per trade.

Sometimes you need more experience. Sometimes you need smaller positions. Sometimes you need to admit you’re risking money without a process you understand and trust.

A strategy with an edge, sensible position sizing, and disciplined exits help you prepare for difficult markets. They cannot guarantee you’ll escape the next crisis untouched. They can help limit the damage and preserve your ability to keep trading.

Think about an athlete. You study, practice, and prepare throughout the week. When the game begins, you need to trust that preparation enough to execute. Obsessing over every possible mistake can interfere with the skills you worked so hard to develop.

As Gary Mack writes in Mind Gym: “Remember, fear doesn’t keep you safe. Your training does.”

Trading requires that same preparation. Study the market. Know your setups. Manage your risk. Review your mistakes. Then practice following your process when the pressure arrives.

Care deeply about doing the work. Give yourself permission to stop agonizing over every outcome.

You can learn every lesson the hard way or you can start listening to the people who already paid for it.

You Can Lose Most of Your Trades and Still Make Money.

Mark Minervini explains that he would rather be able to remain profitable at a 25% win rate than depend on a 75% win rate.

He calls this “building in failure.”

Your stock selection, timing, and execution influence your win rate but you cannot make the next trade a winner. In a difficult market, your win rate can fall and your average gains can shrink.

If your strategy depends on being right most of the time, what happens when those conditions change?

Minervini’s approach is to keep losses small relative to gains, giving his system room to absorb losing trades.

Consider a simple example: one $400 winner and three $100 losers leave you $100 ahead before trading costs. You lost on 75% of your trades and still made money.

What matters is how your win rate, average win, and average loss work together after costs.

Build a process that leaves room for being wrong.

Your Last Five Trades May Tell You More About the Market Than the Index

William O’Neil made a point that I think is one of the most useful market indicators there is:

Pay attention to what is happening with your own recent trades.

If you’ve bought four or five quality setups and none of them are gaining traction, breakouts are failing, stocks are reversing after entry, and positions that should be working simply aren’t, the market may be telling you something before it becomes obvious in the indexes.

There is an important caveat.

This only works if you have learned how to trade, have a defined system, are selecting legitimate setups, managing risk correctly, and have your emotions under control.

If you’re chasing extended stocks, forcing trades, buying mediocre setups, or breaking your rules, your results may be telling you more about your trading than the market.

But once your process is sound and repeatable, I believe the behavior of your individual stocks is one of the best market indicators you can have.

This is also why Mark Minervini talks so much about watching individual stocks. The indexes can look healthy while fewer leaders are setting up, breakouts are failing, and your initial positions aren't gaining traction. Conversely, leading stocks can begin acting well before the indexes make the turn obvious.

The stocks often have the final word.

If I put out a few pilot positions and they immediately start working, holding gains, and offering additional opportunities, I can progressively increase exposure.

If those positions repeatedly fail, I don't need to argue with the market.

I back off.

Your Stop Wasn’t Wrong Just Because the Stock Rebounded

You buy a growth stock from a proper base. The breakout fails, it hits your stop, and you sell.

A few days later, it turns around and takes off.

“I knew I should have held.”

In One Good Trade, Mike Bellafiore writes:

“Do not judge a trade based upon its results!”

He explains that a losing trade can still be a good trade when the reasoning was sound and the execution followed the plan.

William O’Neil addresses the same frustration in How to Make Money in Stocks. After acknowledging that stocks will sometimes recover after you sell, he writes:

“But when this happens, don’t conclude that you were wrong to sell it.”

Bellafiore is discussing intraday trading and O’Neil is position trading. Both passages warn against judging a decision solely by what happened afterward.

That doesn’t mean every entry or stop was well placed. Review the setup, your timing, and your exit. Learn from genuine mistakes.

But a rebound alone doesn’t prove that respecting your stop was one of them.

You made the decision before you knew whether the stock would recover or keep falling. Protecting your capital meant accepting that uncertainty.

Don’t let a stock that came back teach you to hold the next one that doesn’t.

Your Stop-Loss Won’t Save You From Overtrading

In Momentum Masters, Mark Minervini makes a blunt observation:

“A whipsaw market is more dangerous than a bear market.”

For a breakout trader, the trap is easy to recognize.

A stock breaks out. You buy. It reverses. You take a small loss.

Then you do it again. And again.

You’re respecting every stop, but your account keeps shrinking because you keep committing capital to setups that aren’t following through.

Minervini says excessive whipsaws call for examining your selection criteria and the market.

In the same discussion, David Ryan says he reduces exposure and position size. Dan Zanger says he usually steps aside entirely when the market turns choppy.

A stop controls your exit. You still control how much you risk, how often you trade, and whether the next setup deserves your money.

You don’t have to participate in every market.

The market can go nowhere while your account goes down.

99 Wins. One Loss. Account Gone.

One of the most dangerous things the market can do is reward you for a bad habit.

You refuse to cut a loss. The stock recovers. You average down on the next loser. It recovers too. Do this enough times and you start believing you’ve figured something out.

Your win rate looks incredible. Your confidence grows, but so does the amount you’re willing to risk to avoid being wrong.

This can become martingale-style averaging down. The classic martingale doubles the bet after each loss, counting on an eventual win to recover everything. Continually adding to a losing stock can create the same trap: increasing your exposure while depending on a recovery.

Then comes the stock that keeps falling. You keep adding. This time, the recovery never arrives, and one loss wipes out years of gains, or your entire account.

That pattern is called negative skew: frequent small wins interrupted by a rare, devastating loss. When that loss threatens your ability to keep trading, you’re facing risk of ruin.

Win $1,000 on 99 trades, then lose $150,000 on one. You have a 99% win rate and you’re down $51,000.

Yet successful traders can win less than half the time. Even a 20–30% win rate can be profitable when the winners are sufficiently larger than the losses.

The key is staring you right in the face: how much you make when you’re right, and how much you lose when you’re wrong.

That’s why I emphasize getting comfortable taking losses. Small losses are part of the business. Cutting them won’t make a bad strategy profitable, but combined with an edge and sensible position sizing, it helps keep you in the game long enough for your winners to matter.

It reminds me of Tom Hougaard’s book, Best Loser Wins.

I’m willing to take losses along the way. I’m not willing to let one trade end the journey.

Jesse Livermore: A Lower Average Can Become a Bigger Mistake

Jesse Livermore wrote in How to Trade in Stocks:

“Never average losses. Let that thought be written indelibly upon your mind.”

Then he explained the trap.

You buy 100 shares at $50. The stock falls to $47, so you buy another 100 shares to lower your average.

Your average cost improves to $48.50. But you now own twice as much of a stock moving against you.

If it falls to $44, the original shares lose $600. The additional shares lose another $300.

You “improved” your average and increased your loss to $900.

That is why averaging down can feel productive while making the situation worse. You focus on how little the stock needs to recover instead of how much more you stand to lose.

Livermore’s approach was to add as the trade moved in his favor. A losing first purchase was a reason to protect capital, not commit more.

You can always take a fresh entry if the setup returns.

Big Returns Don’t Require Big Risk

If you think superperformance requires risking a huge chunk of your account on every trade, spend more time studying the people who have actually achieved it. David Ryan is a three-time U.S. Investing Champion and William O’Neil protégé. His approach puts risk control first.

In one interview, Ryan described starting positions with 5–10%of his portfolio. If a stock advances, builds an entirely new base, and breaks out again, he can add to that already profitable position. Over time, a successful holding can reach 20–25% of his portfolio. That larger position develops as the stock proves itself.

Here’s the math people miss: a 10% position with an 8% stop represents approximately 0.8% of total portfolio equity in planned risk, assuming execution at the stop. Having 10% invested in a stock does not mean risking 10% of your account.

Ryan described his intention to risk no more than 1% of total equity on an individual trade. He also discussed stops around 7%, with tighter setups sometimes allowing 3–4%. The entry matters because it helps determine how closely you can control the risk.

This is the same discipline I keep coming back to when discussing Ryan, Minervini, Zanger and O’Neil: control losses, choose your entries carefully, and build exposure as trades work.

Yet so many traders study these people’s returns and ignore their risk management. They want the performance without practicing the discipline that produced it.

Sometimes the answers are staring you right in the face.

You Don’t Need to Be Right That Often

One of the best lessons in Momentum Masters is…..

You do not need a high win rate to make big money.

Mark Minervini says he would rather keep losses small and let gains outweigh them than focus on being right all the time.

David Ryan says two or three really good stocks in a year can make up for all the small losses.

Dan Zanger says most of his profits came from a small number of massive winners.

Small losses are part of the business.

The mistake is letting a small loss turn into a large one, or selling your best winners too early.

Keep losses small, let winners run.

Why I Wouldn’t Buy DELL Right Before Earnings

Someone asked me why I wouldn’t buy DELL before earnings, especially when I’ve held other stocks through earnings.

The difference is context.

With LITE, I was already in the stock and had roughly a 25% cushion going into earnings. In situations like that, I may sell some before the report and hold the rest through earnings.

That is completely different from initiating a brand-new position right before earnings.

If you want to hold stocks long enough to capture really big moves, eventually you have to get comfortable sitting through some earnings reports. There is no way around that. Even with a large profit cushion, you can still get hit with an ugly reaction, like we saw with BLLN.

But I will NOT buy a stock immediately before earnings just to gamble on the report.

And with DELL specifically, the decision was even easier.

The stock looked like it wanted to go higher, but showed very little follow-through. Then it had a bad day today, falling more than 6% and closing below the 50-day moving average.

On top of that, the overall market hasn’t been acting well.

So now you have:

• Poor follow-through after a failed breakout attempt

• A greater than 6% down day

• A close below the 50-day moving average

• A less-than-ideal overall market

• Earnings immediately ahead

Why would I initiate a brand-new position and take on earnings risk with all of that working against me?

For me, there is a big difference between holding earnings with a 20% to 30% profit cushion in an existing position and buying a stock immediately before earnings with no cushion at all.

Those are two completely different risk situations.

Now, with DELL up roughly 10% after hours, I’ll watch how the price continues to act and see whether it gives me a setup. It did something similar in early March after the big gap up in late February.

I don’t need to predict the earnings reaction or gamble on the report. I can wait for the report, see how the market reacts, and then look for a proper setup.

The Funny Thing About Making Money in the Market

You would think the best way to make more money in trading is to focus on making money.

For me, the opposite has been true.

The more I’ve focused on protecting capital, controlling risk, cutting losses, and avoiding unnecessary damage, the more money I’ve actually made.

That mindset changes everything.

Instead of asking:

“How much can I make on this trade?”

You start asking:

“How much can I lose if I’m wrong?”

That one shift leads to better position sizing, tighter discipline, fewer emotional decisions, and a much greater ability to stay in the game when conditions get difficult.

Paul Tudor Jones put it perfectly:

“Don’t focus on making money; focus on protecting what you have.” — Paul Tudor Jones

Can You Handle 11 Losses in a Row?

One of the biggest reasons beginner traders fail is not because their strategy has no edge.

They simply cannot handle the losing streaks that mathematically come with it.

A 50% win rate does not mean:

Win → Loss → Win → Loss → Win → Loss

Just like flipping a coin, wins and losses cluster. Over 100 trades, a 50% system can reasonably experience around 6 consecutive losses. Drop the win rate to 30% to 35%, like the type of system Kristjan Kullamägi has openly discussed, and losing streaks of roughly 9 to 11 trades become completely plausible.

Can you take 11 losses in a row and still take trade #12?

Most beginners can't.

First, they're positioned too large, so the drawdown becomes financially painful. Second, they emotionally lose confidence, abandon the strategy, widen stops, revenge trade, or start jumping from one system to another.

Minervini specifically teaches that you want to build failure into your system by keeping losses small enough that you can afford to be wrong repeatedly. When results deteriorate, he says to reduce exposure, not increase it, and then pyramid back up when your trading starts working again. Stanley Druckenmiller does the same thing!

That is why position sizing and progressive exposure matter so much.

Small when you're wrong. Bigger when you're right.

Having an edge isn't enough.

You have to survive long enough, financially and emotionally, for the edge to play out.

When You’re Cold, Stop Swinging for the Fences

Stanley Druckenmiller once said:

“One of my most important jobs as a money manager was to understand whether I was hot or cold. Life goes in streaks, and like a hitter in baseball, sometimes a money manager is seeing the ball and sometimes they’re not... When you are cold, you should be trying for bunts. You shouldn’t be swinging for the fences.”

Sound familiar?

This is essentially what we preach with progressive exposure.

When my trades aren’t working, I don’t respond by getting more aggressive and trying to make the money back.

I get smaller.

I take fewer trades. Smaller positions. Less portfolio exposure. I bunt.

Then, as my trades begin working, setups follow through, and the market confirms that I’m in sync, I progressively increase exposure.

That’s when I start swinging harder.

The market tells you when you’ve earned the right to get aggressive.

Cold → Protect capital. Play small.

Hot → Press your advantage. Get bigger.

One of the biggest mistakes traders make is doing the exact opposite: betting biggest when they’re trading worst because they’re trying to make back what they lost.

Great traders understand that position size should expand and contract with the feedback they are receiving.

You don’t swing for the fences until you’re seeing the ball.

Stop Managing Your Small Account Like a Billion-Dollar Fund

One of the most overlooked advantages in the market is having a smaller account.

We study legendary investors and traders such as Stanley Druckenmiller, Paul Tudor Jones, and Warren Buffett. We can learn tremendously from their principles, but copying how a multibillion-dollar portfolio must operate can cause retail investors to surrender one of their greatest structural advantages:

Speed and mobility.

Large institutions are oil tankers. You are a speedboat.

A large fund cannot move quickly into or out of many stocks without affecting the price. It must focus on highly liquid securities, build positions gradually, and unwind them carefully because institutional trading itself can create significant market impact.

Your account does not have those constraints.

You can:

• Enter and exit positions quickly

• Move into cash without explaining yourself to investors

• Concentrate on your best opportunities

• Trade smaller, liquid growth stocks that cannot meaningfully move the needle for a massive fund

• Change exposure rapidly when market conditions change

This does not mean buying illiquid garbage, overtrading, or taking reckless risks. It means recognizing that your smaller size gives you an opportunity set and level of flexibility that large institutions simply do not have.

Many investors also try to construct their portfolios like Warren Buffett. His principles are invaluable, but Buffett has management access, relationships, and negotiated deal opportunities that most retail investors do not.

More importantly, Berkshire must put an enormous amount of capital to work. Buffett acknowledged this constraint himself in Berkshire’s 2016 shareholder letter:

“What is easy with millions, struggles with billions.”

That is the natural mathematics of scale.

A 10% return on $10 million is $1 million.

A 10% return on $100,000 is only $10,000.

This does not mean someone with $100,000 should gamble recklessly to chase an unrealistic return. It means that a skilled growth stock investor with a smaller account has the flexibility to pursue higher percentage growth in ways that may be impossible for a multibillion-dollar fund.

This is why I am surprised more investors do not take advantage of growth-stock strategies such as William O’Neil’s CANSLIM approach while they are still building their capital.

Focus on:

• High Relative Strength

• Strong earnings and sales growth

• Leading industry groups

• The strongest stocks within those groups

• Sound Stage 2 setups

• Proper entries, position sizing, and risk management

• A healthy general market

The goal is not reckless speed. It is controlled compounding while your account is still small enough to remain fast and flexible.

As your capital grows, it is natural for percentage growth to slow. Your priorities may gradually shift toward diversification, capital preservation, income, and steadier returns.

There is nothing wrong with that.

But too many investors spend decades managing a small account like a pension fund, spreading their capital across slow-moving mega-cap and dividend stocks without ever taking advantage of the flexibility their size gives them.

Learn the principles from the market wizards.

But do not copy their constraints.

You are a speedboat. Stop steering it like an oil tanker.

A 70% Win Rate Means Almost Nothing

Social media has trained traders to worship the wrong number:

Win rate.

Everyone wants the trader who is always right. The person who nails every call. The system with a 70%, 80%, or 90% win rate.

But then you read the Market Wizards books and discover something interesting.

Some of the greatest traders in history were wrong a lot. Many were wrong more often than they were right.

And they still made fortunes.

Why?

Because trading doesn’t pay you for being right.

It pays you for positive expectancy.

A trader can win 40% of the time, keep losses small, make 3R, 5R, or 10R on the big winners, and build an incredible track record.

Another trader can win 80% of the time, take tiny profits, refuse to cut losses, and eventually give it all back.

That’s why win rate by itself tells me almost nothing.

And I think the obsession with being right usually comes from something deeper.

Fear of losing. Fear of being wrong. Ego. Insecurity. The need for certainty.

The market doesn’t care about any of that.

Over a large enough sample of trades, your track record is the report card.

Stop trying to prove how often you’re right.

Learn how to lose small when you’re wrong and make enough when you’re right that being wrong doesn’t matter.

Volatility Can Be Good or Bad. Know the Difference.

Volatility isn’t automatically bad.

Momentum traders need stocks that can move. But there’s a huge difference between volatility that creates opportunity and wide, loose, erratic volatility that makes risk difficult to control.

O’Neil, Minervini, David Ryan, and Dan Zanger approach volatility a little differently, but there’s a common thread:

You want a stock capable of making a meaningful move, while still having a setup that allows you to define and control your risk.

Strength before the setup. Tightness near the entry. Expansion when the move begins.

If you automatically avoid volatility, you may avoid some of the market’s best opportunities. But if you don’t understand the wrong kind of volatility, it can wreck your risk management.

Know the difference.

I break it down in the article below.

https://tradingmomentum.substack.com/p/does-high-volatility-mean-high-risk?r=5ccg85&utm_medium=ios

High Volatility Doesn’t Automatically Mean High Risk

I get asked this a lot:

Should you avoid a stock because its ATR or ADR is high?

Not necessarily.

Dan Zanger specifically wanted stocks that could move. Minervini, O’Neil, and David Ryan focused more on what that volatility was doing near the entry.

The best setups often look like this:

Strength before the setup.

Tightness before the breakout.

Expansion after the breakout.

Minervini even warns about the “bucking broncos,” stocks so volatile that normal movement can knock you out unless you use a stop that is too wide to make sense.

So the question isn’t just:

“Is this stock volatile?”

It’s:

“Can I structure this trade with a precise entry, a sensible stop, and acceptable risk?”

If yes, volatility may be opportunity.

If no, wait for it to tighten or move on.

Never Freeze Under Fire: A Trading Lesson From Marty Schwartz

Marty Schwartz learned this lesson in Marine Officer training. I learned the same lesson years later in Army Infantry Officer training and Ranger School.

And both of us carried it into trading.

“Don’t just sit there if you are getting the hell beat out of you. Even retreating is offensive, because you are still doing something.”

That quote is about decisiveness under pressure.

Schwartz came into the 1987 crash long, realized he was wrong, honored his risk points, and got out. He took a painful loss, but protected the capital he would need to make his comeback.

That same principle applies to trading every day.

If a trade is going against you, don’t freeze. Don’t hope. Don’t rationalize. Don’t sit there because taking the loss feels painful.

Cut the loss. Reduce exposure. Go to cash if needed.

Retreating is still action.

Sometimes the best offensive move you can make is to play defense and preserve enough capital to fight another day.

Growth Traders: Why Are You Using Options?

First, this is specifically for growth-stock investors and momentum traders following a CAN SLIM, O’Neil, Minervini, Ryan, Zanger, Kullamägi or similar approach.

If that’s not how you trade, I’m not talking to you.

For everyone else, ask yourself:

Why are you using options?

If the answer is:

• “I want more leverage.”

• “My account is small.”

• “I can control more shares with less money.”

• “I can make a bigger percentage return.”

Then I’d seriously question whether you should be using them.

Because that’s not really an options strategy.

You’re using options for leverage while accepting expiration, time decay, implied volatility, strike selection, spreads, and liquidity risk.

And I don’t think it’s a coincidence that some of the greatest growth-stock traders we study either rarely used options or actively warned against them.

O’Neil wrote that options involve substantially greater risk and volatility than common stocks and believed investors should first prove they can make money in stocks before considering them.

Minervini stopped trading options because he felt there was too much working against you. David Ryan rarely used them because of time decay. Dan Zanger said he didn’t really start making money until he stopped “playing with options.”

Zanger even listed “Avoid options” as one of his top trading rules.

And for the more aggressive short-term swing traders who look up to Kristjan Kullamägi, the message isn’t much different.

Kullamägi strongly discourages developing stock traders from using options. His own FAQ says to avoid them until you’ve already made millions trading stocks and points out that once you’ve done that, you probably won’t need them anyway. He started with only a few thousand dollars and built an extraordinary fortune trading stocks, ultimately reaching roughly $100 million without needing options as the engine of his strategy.

The strategy we follow does not require options to achieve superperformance.

The edge is finding the strongest stocks, buying them at the right time, controlling risk, cutting losses, and getting the most out of your winners.

If you want more exposure and your system, experience, market conditions, and risk parameters justify it, consider traditional leverage. You don’t need to turn a stock trade into an options trade just to get leverage.

If you want leverage, use leverage. If you want to trade options, have an actual options strategy.

Now, if you’ve built an options-specific system, back-tested it, forward-tested it and/or modeled it, understand exactly what options add to the strategy, and have demonstrated positive expectancy, then by all means use them.

That’s different.

But most growth traders I talk to aren’t using options because options improve their edge.

They’re using them for leverage and making an already difficult game even harder.