Risk Management & Position Sizing

The Answer: Stock C

Obviously, this one was too easy. You all got it.

This is something Dr. Van Tharp really drives home throughout his work: stop thinking only in percentages and start thinking in terms of R, or the amount you are risking on the trade.

A lot of traders look only at the potential gain.

“How much can I make?”

But the better question is:

“How much am I risking to make it?”

Here is the breakdown:

• Stock A: Risk 10% to make 30% = 3R

• Stock B: Risk 8% to make 20% = 2.5R

• Stock C: Risk 6% to make 24% = 4R

• Stock D: Risk 3% to make 6% = 2R

• Stock E: Risk 20% to make 50% = 2.5R

Even though Stock E had the biggest potential gain, Stock C offered the best return relative to the amount being risked.

That is the difference between chasing the biggest number and evaluating the quality of the trade.

William O’Neil, Mark Minervini, David Ryan, and Dan Zanger all built their approaches around buying correctly, defining risk, and keeping losses under control.

There is also another reason Stock C stands out.

Suppose your rule is to risk no more than 1% of your portfolio on any trade.

With a 20% stop, you can only take about a 5% position.

With a 10% stop, you can take about a 10% position.

With a 6% stop, you can take roughly a 16.7% position.

So a tight, logical stop does more than reduce the damage when you are wrong.

It allows you to take a more meaningful position while keeping total portfolio risk exactly the same.

That is why proper entries matter so much.

The goal is not simply to find the stock with the biggest possible upside.

The goal is to find the highest-quality setup with the best reward relative to the amount you must risk.

Amateurs focus on how much they can make.

Professionals focus on how much they can lose.

And they express that relationship in R.

Your Stop Is Nonnegotiable. After That, the Stock and the Market Get a Vote.

Before I enter a trade, I build a plan.

My initial stop is nonnegotiable. I am 100% strict with it. I do not widen it, lower it, or give the stock more room because I suddenly feel hopeful.

At that point, my principal is still at risk and the stock has not proven itself.

But once the trade begins working, I sell some into strength and move my stop toward breakeven. From there, I still follow my plan, but I become more adaptable.

When I was in the military, we built detailed plans, but we always understood one thing:

The enemy gets a vote too.

Trading is no different.

The stock gets a vote.

Price action gets a vote.

The overall market gets a vote.

Be rigid with your initial risk.

Be adaptable once the trade has earned that flexibility.

Which Trade Would You Take?

Assume all five stocks are equally high-quality setups and each has met your buy criteria.

Which trade would you take?

Stock A

• Risking 10%

• Potential Gain: 30%

Stock B

• Risking 8%

• Potential Gain: 20%

Stock C

• Risking 6%

• Potential Gain: 24%

Stock D

• Risking 3%

• Potential Gain: 6%

Stock E

• Risking 20%

• Potential Gain: 50%

👇 Comment A, B, C, D, or E.

I'll post the answer tomorrow.

Position Size Like a Market Wizard

Using Bruce Kovner’s stop-loss principle to plan the trade before the trade begins.

“Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.” - Bruce Kovner

The Market Wizard Rule Most Traders Ignore

One of the biggest lessons from Market Wizards is that great traders do not enter positions casually. They know where they are wrong before they ever get in. Bruce Kovner explained this perfectly when he said:

“Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.”

- Bruce Kovner

William O’Neil: Stop Owning Stocks You Barely Understand

“Diversification is a hedge for ignorance. I think you are much better off owning a few stocks and knowing a great deal about them. By being very selective, you increase your chances of picking superior performers. You can also watch those stocks much more carefully, which is important in controlling risk.”

-William O’Neil

Most traders think owning more stocks lowers risk.

But often, it just lowers focus.

The more stocks you own, the less you know about each one.

You stop paying close attention.

You react slower.

You miss the subtle changes in price, volume, and leadership.

The goal is not to own everything.

The goal is to own the right merchandise.

That does not mean you always know the winner in advance.

Sometimes several stocks meet your criteria at the same time.

That is okay.

You let the market sort them out.

Cut the ones that break down.

Reduce or cut the ones that do nothing.

Hold and add to the ones proving themselves.

That is how a focused portfolio is built.

Not by guessing.

Not by owning everything.

By finding leadership, letting winners earn more capital, and managing risk with discipline.

This is one of the core principles behind the Momentum Trading Strategy Course and our Relative Strength Stock Screener.

The big money is rarely made by owning everything.

It is made by owning the right stocks.

The Paul Tudor Jones Risk Rule Every Trader Should Know

“Decrease your trading volume when you are trading poorly; increase your volume when you are trading well.”

-Paul Tudor Jones

Most traders do the exact opposite.

They trade bigger after losses because they want to make the money back.

Then, when they finally get in sync with the market, they reduce their size, trade frequency, and cut winners because they are afraid to lose profits.

That is backward.

The best traders trade their smallest when they are trading poorly and their largest when they are trading their best.

Mark Minervini teaches the same principle. When you are in an abnormal losing streak, scale down your exposure. Do not try to trade bigger to make it back fast. Cut your size, protect your capital, and only pyramid back up when your trading plan starts working again.

This is what Minervini calls Progressive Exposure.

Build on success.

Subtract on setbacks.

Let your results tell you when to press and when to pull back.

This is one of the core risk management principles we teach in Module 6 of the Momentum Trading Strategy Course, available for all paid subscribers.

The market does not reward constant aggression.

It rewards disciplined aggression.

Is the Momentum Trade Back?

I had someone ask if the momentum trade is back.

My answer is that momentum is improving again, but I would not call it fully back yet.

Today we got back above the short-term moving averages, the 10-day and 20-day, which is good. But realistically, we could still reject near the highs again like we did last week and quickly be back in the danger zone.

Since the big down day on June 5th, there has been a clear character change. The tape has been more volatile, choppy, and whippy. This is not the same easy market we had from the April follow-through day into early June.

With that being said, some select growth stocks are acting very well. Ideally, I want to see the indexes and individual leaders moving together, but many times the best stocks start to lead before the market fully confirms.

The key is this: if the market breaks out cleanly, a lot of these leaders could keep working. But if the market rolls back over, many of the names acting well right now will likely get pulled back with it.

So yes, there are opportunities again, but the environment is more difficult.

I also would not be surprised if this turns into another false rally attempt toward new highs. In this type of environment, the pros are usually moving stops to breakeven faster, keeping exposure a little lighter, and being prepared to take more small losses.

The easy environment is likely over for now. I doubt we will see the same smooth trend higher that we had from April into early June. But I could be wrong.

The way I play this is that if my individual stocks are working, I keep trading and look to increase exposure and size. If I start taking more losses, I cut back, reduce trade frequency, and reduce size.

I also try to get my stops to breakeven as quickly as possible, or I sell some into strength sooner and keep the original stop in place. That way, I have financed the risk on the trade, so I am no longer in a position where I can take a loss.

I can then afford to take more flat trades without damaging my account. Sure, the downside is smaller wins if we get follow-through, but that is okay. In these environments, I focus on protecting what I have.

Then, if the market keeps moving higher and breaks out to new highs, that helps clear overhead supply and I can look to add to my winning positions.

This is where individual stock performance determines whether momentum is truly “back again.”

“Don’t focus on making money; focus on protecting what you have.” 

-Paul Tudor Jones

The Real Holy Grail in Trading

One of the easiest ways to spot an inexperienced trader is when they act like their strategy is the only way to make money.

Maybe they are not a complete beginner anymore, but they are still inexperienced if they believe their style is the only style that works.

Anyone who has been around this game long enough knows there are many different ways to make millions in the markets.

Read the Market Wizards books and you will see it clearly.

Some of the best traders are discretionary. Some are systematic. Some are quants. Some are fully technical. Some are fully fundamental. Some are techno-fundamental and use both.

There are day traders, swing traders, position traders, macro traders, futures traders, stock traders, options traders, and short sellers who have all built incredible records doing things completely different.

My lane is growth stock momentum trading.

I primarily trade as a swing trader and position trader. I use technicals and fundamentals, and I would say my style is most similar to traders like William O’Neil, Mark Minervini, and Dan Zanger.

That style fits my personality, my strengths, and my lifestyle.

I actually love day trading, but having four kids and businesses outside of trading, I have found that it does not fit the season of life I am in. It can easily pull me into a place that is not healthy or sustainable for me.

So regardless of the method I use, I know someone else can be wildly successful trading a completely different way.

That is why I stay in my lane.

I am here for people who align with my style or want to learn it. I am not here to pretend it is the only way to make money.

That is why I laugh when I see traders on here pushing their method like it is the holy grail.

To experienced traders, that does not look confident.

It looks ignorant.

Because the real pros know the truth.

The common thread between great traders is not that they all trade the same setup, the same timeframe, the same asset class, or the same strategy.

They don’t.

The common thread is risk management, position sizing, discipline, and the ability to admit when they are wrong and cut losses.

That is the real holy grail.

So when you see traders constantly talking about risk, position sizing, cutting losses, protecting capital, and surviving long enough for their edge to play out, pay attention.

Those are usually the ones who actually know what they are talking about.

You Have Not Earned the Right to Trade Larger Yet

Most traders skip the step that would probably save them.

Many leading trading firms do not just hand traders money and tell them to go figure it out.

They make them trade in simulation first.

Not for a day. Not for a week.

Until they prove they can actually trade the strategy.

Then, when they go live, their size is small.

Very small.

Only after they show consistency does the firm gradually increase their buying power.

You must earn the right to trade larger.

Now compare that to what most traders do.

They learn a setup on YouTube, fund an account, take full-size trades, have no clue how to use position sizing, lose money, change strategies, repeat the cycle, and wonder why they cannot find consistency.

If you have not found success in the markets, I can almost guarantee you have not followed this process.

Why not?

Stop wasting time and commit to doing it the right way, or save your money and do something else.

You Can Trade Without Risk Management, But You Won’t Last

I just finished the new Market Wizards book, and one thing jumped off the page again and again.

Different traders. Different time frames. Different strategies. Different markets.

Same lesson.

The traders who survived all became risk managers.

A lot of them started the way most traders start.

Chasing setups. Trying to find the perfect entry. Trying to turn a small amount of money into something meaningful. Trading too big. Ignoring risk. Blowing up, sometimes more than once.

But the ones who lasted all eventually came to the same conclusion:

Cutting losses is not optional. It is the job.

Most struggling traders are spending almost all of their time trying to find better stocks, better setups, better screens, better entries, and better indicators.

But the best traders in the world keep pointing back to the same thing:

Risk management. Position sizing. Cutting losses. Surviving long enough for your edge to matter.

If you do not have the results you want yet, it may not be because you need another setup.

It may be because you have not gone deep enough into risk management and position sizing strategies.

That is exactly why Module 6 of my course is focused on risk management, position sizing, portfolio exposure, and how to think about risk like a professional.

I also walk through how I use my position sizing tool before every trade that we have built into the Momentum Trading Strategy Web App.

Because finding the stock is only one part of the game.

Knowing how much to risk, where you are wrong, and how to survive long enough to let your winners work is what keeps you in the game.

Check out Module 6 here: https://tradingmomentum.substack.com/p/momentum-trading-strategy-risk-management

“Diversification is a hedge for ignorance. I think you are much better off owning a few stocks and knowing a great deal about them.”

- William O’Neil

When You’re in a Slump, Stop Trying to Hit Home Runs

Market Wizard Victor Sperandeo gave one of the best answers I’ve heard on how to deal with a losing streak.

When Jack Schwager asked him how he gets back into trading, Sperandeo compared it to Ty Cobb.

“Ty Cobb once was asked why he never had slumps. He said that whenever he felt himself getting into a slump, he wouldn’t try to get a hit, but he would simply try to make contact with the ball. To relate that concept to trading, when you’re in a slump, try to be patient and wait for a trade that you feel very confident about and keep the bet size small. Your goal should not be to make lots of money but rather to get your confidence back by making correct decisions.” -Victor Sperandeo

“After a devastating loss, I always play very small and try to get black ink, black ink. It’s not how much money I make, but just getting my rhythm and confidence back.”

-Marty Schwartz

“There are old traders and there are bold traders, but there are very few old, bold traders.” - Ed Seykota

You Can Get Rich Without Risking Ruin

You can make millions risking half a percent to one percent per trade.

So why are you risking blowing up your account?

That is the part most traders never think through.

They act like they need to risk 10% or more on a single idea to build real wealth. But the best traders understand something most beginners ignore:

Survival comes first.

If you have a real edge, you do not need to bet the farm.

You need to stay in the game long enough for that edge to compound.

A 0.5% to 1% risk per trade may sound boring, but boring is usually what keeps you alive.

Big accounts are not built by one heroic trade.

They are built by protecting capital, cutting losses, letting winners work, and repeating the process over and over again.

Plenty of Market Wizards have turned a few thousand into millions by following this principle.

So why aren’t you?

Nervous About a Trade? Your Position Is Too Big.

If you've done your homework, the stock has the characteristics of past market leaders, and it fits your process, but you're still nervous before entering the trade, the answer is usually simple:

Get smaller.

For one trader, that might mean a $100 position. For another, it might mean $1,000, $10,000, or $100,000.

The dollar amount does not matter. What matters is risking an appropriate amount based on your system and your own ability to follow the plan without fear taking over.

Say your system allows you to risk 1% to 2.5% of your total portfolio on a trade, but you still feel pressure, fear, or hesitation. Drop the risk until that feeling goes away.

Maybe that means risking 0.25% of total equity. Maybe it means even less.

That is fine.

If you're constantly checking the position, losing sleep, or second-guessing every tick, your size is too large for your current comfort level.

Reduce it until you're completely comfortable.

Trading is psychological. The right position size is different for every person. Over time, as your confidence and experience grow, your size can grow too.

But the solution to fear is rarely more courage.

It's usually smaller size.

The Best Traders Usually Live By the Same Rules

Larry Hite said the rules they lived by at Mint Investments were simple:

1. Never risk more than 1% of total equity on any trade.

2. Always follow the trends and never deviate from the method.

Risk first.

Trend second.

Process always.

And even though Hite was a systematic trend follower, this is not much different from what O’Neil taught as a techno-fundamental growth stock trader.

Different style.

Same foundation.

Protect your capital.

Trade with the trend.

Stick to your process.

The best traders usually are not doing something wildly different.

They are just better at following the rules most people ignore.

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