If you trade long enough, you will most certainly have trades that go against you in a big way, at one point or another. As we have seen over the past few weeks, the market is capable of doing anything at any given time. Essentially, we were within 2% of 52-week highs on the S&P 500 as recently as late July, only to see a bonafide crash materialize out of nowhere. When this type of event happens, fancy hedge funds and retail traders alike will blow up their accounts and, unfortunately, be forced out of this business.
It is especially in times like these when you will need a saving grace to help prevent a fatal blow to your precious capital. In the following video, I discuss how position sizing is your first and last line of defense against the volatile and heartless beast known as Mr. Market. While stop-loss placement is more of an art and the subject of great debate, position sizing is more of a rigid science that should not be toyed with too much. Indeed, it makes all the difference in the world to see a trade get out of hand on the downside when it is only 8-10% of your portfolio, in lieu of being all-in long on margin.
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