Beginning traders often underestimate the importance of position sizing. However, besides stop placement it makes a huge difference for risk management. Tom Basso was featured in Jack Schwager’s New Market Wizards book that I have also reviewed here in my blog. This short ebook on why and how to size positions was published by Tom in 2019.
I was looking for ideas how to define closed and open equity for position sizing and this book validated some thoughts I had. Tom makes the content simple to understand and runs simulations for each hypothesis.
He first shows why and how to calculate risk per trade using either a percentage of capital or volatility. I use both ways in my own portfolio. He also makes the case for closed and open equity and what to use for calculations.
Next, the author explains why he peels off some of his winning trades that become too large in the portfolio increasing both, risk and volatility. I don’t do such vol targeting myself as in my view it’s not letting profits truly run. I like volatility working in my favor and don’t want to penalize it. But I do understand Tom’s view of the open trade risk management.
The third main element in this book is the overall portfolio risk. You may limit your risk per trade but it’s mutually important to manage the risk of all open positions. I definitely need to pay attention to it myself, because I trade my systems only in the US equity market. Stocks become correlated in downfalls and that’s why I diversify my trading with a basket of uncorrelated strategies.
It’s a short ebook on a concrete topic. I recommend this book to stock, forex and futures traders struggling with proper position sizing.Share this post