The Psychology of Sizing
Below is a wonderful contribution to our learning/growth shared by an SMB Blog Reader and professional trader.
For the past 4 months I’ve been battling with risk management. It’s been my Achilles heel. Its has completely destroyed my consistency. I’ve made big and I’ve also lost big. I’d say that 80% of my trades have good technical structure and fundamental catalysts. However, when I’m oversized and I lose; it tends to wipe out a few of my positive days. I’ve tried many things, from risk management exercises, journaling, and visualization exercises, etc…
However, I’m still struggling with my risk management. My issue is primarily initiating positions with too much size, later freezing due to the large unrealized loss and failing to adhere to my stop.
While I’ve researched several ways to help improve this weakness, I’ve never understood why? Why is it that I automatically type in 1000 shares or 500 shares into my market maker? Is it that I’m greedy? Careless? Is it that I don’t know what I’m doing? Why is it that I automatically jump into these large share lots that are much more than what I’m consciously willing to risk? Over the past four months, I’ve never been able to find a reason why I do this?
This past weekend I saw a psychotherapist, who made a presentation at a weekly weightloss support group I’ve been attending since Jan 1st (Lost 10 lbs - so far!!!). One of the points that struck me the most from the session with the psychotherapist is when she said “no one does anything for the heck of it.” A binge eater does not eat for the sake of eating, a binge drinker does not drink for the sake of another drink, they do so in order to fulfill something. Boredom, depression, a feeling of added value (i.e. biggest drinker or biggest eater is manlier than the rest). I was left with the home work of looking into my past and asking myself, why do I overeat?
Today I asked myself why do I add size beyond my acceptable risk? Why do I go for it? After some introspection I’ve realized the following: When I was small I hit a very memorable home run during my little league game that got my team into the playoffs. It felt great, my parents and my team were all proud of me. When I was in my high school swim team, I disliked the distance event because I felt that it was boring and unpopular, I enjoyed the fast energy/power driven sprints and the mid-distance events. I’ve always leaned towards power driven events and scenarios. I take too much size because it makes me feel great, like I’m in contention to hit another home run, re-live the big win, and be recognized as a great young trader among my peers.
I couldn’t be further from the truth. If taking on size, putting on tons of risk, and automatically hitting 1000 share lots increases my self-worth; then why am I down over $1,000 today, why do I feel horrible after realizing the large loss? The large size does not increase my-self worth; instead it puts me at risk of feeling worse, just like binge eating temporarily makes you feel better, but does not resolve anything. Large size only adds risk; it does not increase the trade’s probability of success. While I may feel like I’m in contention to hit a home run, I’m truly in contention to blow up. Deep down, I know that my trading P&L and trading in general have nothing to do with my self-worth. Yet somehow, I’ve managed to equate large size with the happy memory of winning.
From my psychology studies of Ari Kiev, and Dr. Steenbarger; I realize that the next step is really to acknowledge this occurrence. Rather than fight it and work my hardest to avoid it; the most powerful approach is to simply recognize that this is what I’m doing and that this mindset is flawed. The real way to achieve the home run feeling will come from consistently placing risk managed trades, that with time will equate to a home run month. The nutritional psychotherapist said the same thing: “The most powerful thing one can do is to recognize why and acknowledge it “- within time I will see that while I have the option and the power of adding 1000 to 2000+ shares, I will not be tempted to use it because I consciously understand that trading size does not measure me as a trader.
While I’m down $1,000 today; I’ve taken a powerful step in the right direction
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