Magic Multiples For Position Sizing

Many people asked about my strategy of position sizing. I know the standard techniques involve calculating the exact number of contracts based on certain threshold of your trading capital to optimize performance. Since I do not stretch my trading capital for maximum exposure, it is not what I do. My method evolves around 2 magic numbers – multiples of 3 and 4.

I started out trading single lot like everyone else. As I started to add more contracts, I experimented with various position sizing schemes and I can tell you the idea of maximized exposure is definitely the worst experience I have. Over time I settled on this interesting method to scale up and down in various market conditions. It works quite well and it is easy to follow once you understand the reasoning behind.

Following is a table how I scale out of a position in normal situation based on the entry size. The last few lines show 2 ways to split the remaining position on the 3rd and 4th exit.

There are 2 goals to my scaling method:

1. To be able to split the initial position into half or 1/3

2. To be able to do that again on the remaining position one or two more times

The concept itself automatically drives the initial position size to be a multiple of 3 and 4. Hence I seldom do round number lots like 20 or 50. 30 works ok and 60 is probably the only round number that works with my scheme for position size under 100.

Logic Behind The Magic Multiples

The reason for splitting the position into 3 parts is that most of the trading setups I take can be traded mechanically with 3 types of targets.

One is a high probability target (70%+) that is very likely to happen.

Another one is good probability target (60%+) that will likely happen if the first target is tagged and breached.

Last one is a trailing stop based method with exhaustion exit.

As I put on the position it is the same as putting on 3 positions separately. Hence the need to manage them separately.

The reason for the ability to split the position into half is my contingency plan.

When the market does not unfold as expected, the probability of tagging my further out targets will be greatly reduced, so it is just foolish to hold onto the complete 2nd and 3rd part of the position upon tagging the first target. Taking half out instead of my regular 1/3 is to reduce exposure on the 2nd and 3rd part of the position at the same time I close out the 1st part. It is just more convenient to do so.

Sometimes I take out 2/3 upon tagging the first target if the trailing stop based portion has signal me with an exhaustion exit. It happens from time to time when I am trading on the wrong side of the market.

A Conservative Approach

Notice the scaling of size jump by 6 contracts. What it means is that to increase or decrease position size I usually round them down to multiple of 6 and if possible multiple of 12. The idea is to make sure I allocate even size for each of my 3 parts in a position.

That also means I have to wait for my trading account to grow enough money to cover 6 more contracts before I would increase my maximum position size. I do not increase my maximum position size within a year. That is done only once at the beginning of the year.

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