TRADING: Trading edge vs. Position sizing. Which is the winner?

Traders, what is more important:

Trading edge or position sizing?

Let's play a game to decide!

You need:

• A calculator

• To take notes

• To pay attention

Ok, here it is:

You've got 3 trading accounts.

Each of them has different objectives.

#1. Be profitable at the end of the game

#2. Make as much money as possible

#3. Lose as little money as possible

This is how we play:

1. Define the risk for a single trade

2. Use a random generator to generate results of 20 trades

Use range from -5 to +10.

I know, generous, but it's a game.

3. Calculate the results (multiply the number by the risk)

Simple enough?

Ok, I'll go first.

1. My risk for 1 trade with the accounts above will be:

#1 - 1% (trying to stay profitable)

#2 - 3% (trying to make the most)

#3 - 0.5% (trying to lose the least)

2. - the range is -5 to 10

Let's see the results:

These are my results:

What I learned from them:

1. 2 losing streaks (losing 12R and 11R)

2. 1 winning streak of 8 trades

3. The result is this:

Account #1 - gain 32%

Account #2 - gain 96%

Account #3 - gain 16%

See the results in the table:

What can you learn from this game?

1. Choose your risk carefully

It's hard to stay in the game when you risk too much on a single trade.

How would you feel being down 36% after the first 3 trades (acc. #2)?

Would it be easy to stay rational?

2. Revenge trading can kill you.

Risk the same risk on every trade

Let's assume you decide to double your risk after the first trade.

You take another 2 losses, but in acc. #2 you risk 6% on a trade.

You'd be down 57% after 3 trades!

Hard to recover.

3. Your PnL depends on position size

The results of trades are the same, but:

Every account has a different PnL.

What does it mean?

Position sizing is ALWAYS first.

Try playing the game a few times.

You'll learn to think in trade samples.

Your trading edge is important.

But, it always comes after position size:

1. Choose your risk carefully

2. Risk the same on every trade

2. Your PnL depends on position size

This game teaches you to:

• think in probabilities & sample sizes

• detach from 1 trade

Thank you for reading.

Remember the order:

1. Trading Mindset

2. Position sizing

3. Trading edge

Good luck!

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