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Position Size, Risk & the Anxiety Test

A man stands by the Vancouver waterfront holding a coffee, illustrating position sizing, trading risk and protecting peace of mind.

There is math behind position sizing. There is also psychology.

One of the simplest gauges I use is how I feel when I make the trade. If I am unusually nervous the moment I hit buy, I pay attention to that. I may simply be in too heavy.

The appeal of a larger position is obvious: if I am right, the same percentage move creates a larger dollar profit. The opposite is equally true. More size means more of everything, including emotion.

A position that is too large can turn a perfectly reasonable setup into an emotional event. I may sell a good trade too early because I am afraid of losing money, or refuse to sell a bad one because the loss feels too painful to accept. Neither helps me read the market clearly.

So I use anxiety as information about me, not about the stock. If I cannot think clearly around the position, I ask whether the position is the problem.

When I am learning a new strategy, I also start smaller. I would rather build confidence through repetition than read about a setup once and immediately make it a major bet.

The actual economics still matter. I want to understand the potential gain and loss in dollars, transaction costs, and whether the position makes sense relative to the liquidity of the security. That last point matters a lot in small caps. It is one thing to be comfortable buying a large position. It is another to be able to get out of it when I want to.

I generally do not want one trade determining the fate of the portfolio. I want a position large enough to matter if I am right and small enough that I can still sleep and think clearly if the market starts moving against me.

For the larger framework, read How I Think About Trading, Plan the Trade Before You Enter It, and Getting Shaken Out Is Better Than Getting Blown Out.

Continue exploring

This article is part of my Trading & Markets authority series. Continue with Capital Markets hub, Support & Resistance: The Simplest Market Structure I Use, Swing Trading vs. Breakout Trading: The Two Setups I Use Most and The First Breakout: How I Look for Emerging Momentum.

This article reflects my personal trading approach and is for educational purposes only. It is not financial or investment advice. Trading involves risk, including possible loss of capital.

Chad McMillan

Chad McMillan is a creative entrepreneur and strategic advisor with over 20 years of experience in and around the capital markets, focused on finding hidden potential in companies, ideas, markets and people, and advancing what they can become.