Reader Question: Intraday Position Sizing?

Dmitry asks (his question in italics and I edited it only slightly):

I trade USD/JPY, GBP/USD, AUD/USD on a 15 min timeframe and look at 180 min and Daily chart as a big picture. 70-80% of my trades are countertrend and 20-30% trend continuation. Your webinars were very helpful for me. I got ideas which I missed in my trading. And most important idea is trade management and trading for consistent income, instead of catching home runs. My mistake in the past was that I enter well, but then leave money on the table, because of trend following mindset… Last 4 weeks I incorporated some of your ideas about exit strategy in my intraday trading and I became make profit almost every day for the past 4 weeks. Big Thanks, Adam!

You’re welcome, and I’m very glad to hear of the improvements in your trading. You make a few good points here, but the most important is the “home run” mindset. This can work in some contexts, but where it (probably) cannot work is for a countertrend trader. In general, with-trend trading styles tend to reward slower action (“let your profits run”) while countertrend styles usually require more decisive action. A trend trader is often better of doing nothing (within her risk parameters—when your stop is hit, get out); a countertrend trader often needs to develop a mindset of taking profits when and where the market makes them available. Trying to trade countertrend and hit home runs is a formula for a very difficult trading career—I’m not saying it’s impossible, but it’s very difficult.

I have a question about position size. Every trade requires different stop-loss. In one trade protective stop would be 21 pips, in other trade it would be 13 pips, etc. But in intraday trading there is not always time to calculate exact position size for always different protective stop. Also during fast volatile market execution can be at another price, than we thought when push the button to open a trade. This factor will also increasing stop size, despite what we planned in position sizing calculation. So, I calculate position size for Maximum size of protective stop (max 20 pips on a 15 min chart in current market condition) and then trade each trade with Constant position size, despite the fact that each trade required different size of protective stop (eg, sometimes 12 pips, sometimes 18 pips). Do you approve this approach, Adam?

So the question here relates to position sizing for intraday traders. As some background for readers who may not be familiar, I advocate a plan where each trade risks a fixed percentage of your account equity. This requires some calculations using the stop size and the total value of your account at the time of entry; nothing elaborate, but it does take some time and something intraday traders don’t have is a lot of time between deciding to trade and pushing the button. Many intraday stock traders trade a fixed size (number of shares, contracts, etc.) regardless of the market being traded or the type of trade, but that might not be the best thing. I’ve used a few different solutions when I’ve been trading very short-term. Maybe some of these will help you:

  • Create a table showing the stop size in one column and the necessary trading size for that stop size in the second column. You can generate this every morning based on your account value, and it doesn’t have to be exact. Get it close, but do make some adjustments. Rather than list 1,2,3,… pips, maybe you only list 1,5,10… or 1,3,5,…. Speed matters, so you want to be able to find your necessary trading size at a glance.
  • Trade two different sizes “large and small”. To use numbers from your question, maybe you would know what your size should be for 10 pips and then for 20, and you can adjust in the middle if you want to.
  • It is better to be too small than too big. If you find yourself too big and you’re uncomfortable, adjust.
  • Make all your trades use the same size stop. This is the Procrustean approach, and usually doesn’t really make sense.
  • Use the same trading size regardless of stop size. This is not ideal, but some people may find it to be the only workable solution.

I hope these ideas help. You’re thinking of the critical questions, and working to adapt them to your specific trading situation. As a last thought, be careful of overcomplicating. You want to find an answer that helps you without adding too much undue complication to your trading process. Good luck and good trading!

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Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.