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Accounts for 90% of performance variation among professional traders
Trade allocation determines outcomes
Most traders focus on entries.
Professionals focus on size.
Position sizing explains 90% of performance variation among traders.
(Research: Dr. Van Tharp — Position Sizing: The Key to Trading Success)
The edge is not just what you trade — but how much.
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Why Size Matters More than Accuracy
Two traders.
Same entries.
Same exits.
Same strategy.
The only difference?
How much they risk.
One compounds steadily.
The other blows up after a losing streak.
This is the math of survival vs. destruction.
Academic experiments confirm the pattern:
| Study | Finding |
|---|---|
| Uppsala University (52 traders) | Bankrupt traders risked 22.9% per trade; survivors risked 6.6% |
| Haghani & Dewey experiment (61 finance students) | 28% went broke despite knowing optimal sizing |
| Terry Odean analysis (10,000 accounts) | Overactive + oversized traders underperform consistently |
The lesson is simple:
Over-sizing is lethal — even when the strategy is right.
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The Professional Framework for Size
There are three useful approaches:
1️⃣ Risk-based sizing (Primary tool for most traders)
2️⃣ Volatility adjustment (protects against high-variance moves)
3️⃣ Portfolio heat (controls total exposure across positions)
Risk-based formula:
Max Position Size = (Account × Risk%) ÷ Stop Distance
Example:
- $50,000 account
- Risk = 1% → $500
- Stop = $5 per share risk
→ 5 = 100 shares max
The method scales logically:
| Account | 1% Risk | What it Enables |
|---|---|---|
| $5,000 | $50 | Small positioning |
| $10,000 | $100 | Meaningful scaling |
| $50,000 | $500 | Professional size control |
Confidence never determines size.
Risk math does.
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Volatility Adjustment
Volatility expansion increases account risk without changing position size.
Simple rule:
When ATR is above average → size down proportionally
When ATR is compressed → standard size
If ATR is 50% higher than normal:
→ reduce position by 33–50%
If volatility doubles:
→ cut position by 50%
Volatility kills faster than drawdowns show.
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Portfolio Heat — Your Real Risk
Individual trades do not destroy accounts.
Correlation does.
Portfolio Heat = Sum of all open position risks
Guidelines:
| Profile | Max Heat |
|---|---|
| Conservative | 10% |
| Moderate | 15% |
| Aggressive (experienced only) | 20–25% |
If heat is maxed:
no new trades — regardless of conviction.
This is where most traders fail.
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Execution Rules that Prevent Ruin
A proven operating system:
1️⃣ Baseline risk: 1–2% per trade
2️⃣ Paul Tudor Jones Rule: After 3 losses → cut size in half
3️⃣ Drawdown response:
-10% equity: size −25%
-20% equity: size −50%
-30% equity: stop trading and reassess
Trade your smallest when trading worst.
Discipline beats impulse.
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Rare Exceptions — When Exposure Can Increase
Soros 1992.
Buffett 1966.
Extreme sizing only applies when:
- Independent edges stack
- Payoff is asymmetric
- Risk is defined and capped
- Information quality is proven
These situations appear maybe twice in a career.
Patience is the edge that sees them.
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Action Implementation
Start with:
1️⃣ Define your maximum dollars at risk
2️⃣ Track 20–50 trades with:
- Conviction rating vs. R-multiple outcome
- Volatility at entry
- Heat at entry
3️⃣ Calibrate position sizing only after evidence
Sustainable growth is statistical, not emotional.
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Visual Breakdown — Video Edition
These lessons are part of my ongoing public research on
Risk1Reward3.
Position Sizing — The 90% That Actually Matters
How sizing drives real performance outcomes.
→ Watch more: Risk1Reward3 YouTube Channel
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See also: Risk Management
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