Position size is part of your strategy/system and should not be determined by your desires or fears. Here’s a breakdown to deepen your understanding about position sizing.
While it’s often said “reduce position size if you can’t cut losses” or “reduce position size if you’re scared,” the fundamental cause of fear and inability to cut losses isn’t position size, and it’s not good to determine position size based on your emotions. The root cause is your ignorance about trading, and large position sizes are merely a byproduct of this.
First, position size should not be determined by your emotions. If you trade with reckless position sizes because you’re “emotionally okay” or “not scared,” you’ll go bankrupt. Your emotions are completely irrelevant, and you must trade with zero-bankruptcy-risk position sizing based on system performance.
Your emotional issues arise from problems in your thought processes and beliefs, such as having negative perceptions about cutting losses, not understanding system performance, or not trusting it. Therefore, even if you reduce position size to ease your mind, your capital won’t grow if you don’t understand the system or if the system lacks an edge.
When you thoroughly test your system, understand its performance, trust in the consistency of both the system and yourself, and apply zero-bankruptcy-risk position sizing with probabilistic thinking, your fears will disappear because you understand what you’re doing. Naturally, “inability to cut losses” will also disappear. You’ll already understand that cutting losses has an edge, and you’ll have accepted the risk of a single trade based on system performance as part of the system.
Therefore, common advice like “reduce position size if you can’t cut losses” or “reduce position size if you’re scared” is not fundamental on its own. Without addressing the fundamental solution, it only extends the time until bankruptcy.
This is because someone who reduces position size based on emotions might easily increase it again when they experience a winning streak due to random favorable variance.
As long as “emotional reasoning drives decision-making,” success in trading is impossible, and these are the reasons why reducing position size to ease emotions only serves as a temporary life support measure.
Your trading problems cannot be solved merely by changing position size.
Appropriate position sizing is a byproduct of proper understanding and edge, and “position size itself is part of the system.” This is because the system exists not for immediate wins and losses, but “with the premise of repetition,” and to leverage its edge, it requires appropriate position sizing corresponding to system performance to collect sample size while experiencing wins and losses repeatedly.
Study trading thoroughly, understand probabilistic thinking, and build understanding and trust in your system through extensive practice with rigorous backtesting.
Then, appropriate position sizing, bankruptcy-proof position sizing, will naturally be derived from rational rather than emotional foundations. This foundation won’t easily change with mood, and it will fundamentally eliminate your fears.