How to size your trades, manage drawdowns, and build mental resilience

Position Sizing: Your Most Powerful Risk Tool

Picture a poker table in Vegas. The best players don’t go all-in on every hand. They size their bets carefully, based on the odds, their position, and the behavior of other players. Trading is no different. Your biggest edge isn’t just your strategy—it’s knowing how much to risk when the cards are uncertain.

Position sizing is the lever that connects strategy to survival. Even the sharpest edge can be dulled by poor risk control.

One timeless rule used by experienced traders: risk no more than 1–2% of your trading capital per trade.

Why? Because markets can and will humble you. Even systems with a strong statistical edge will face losing streaks. Sizing trades too large compounds the psychological and financial damage.

Let’s put it into perspective: risking 10% of your capital per trade means that just five consecutive losses will cut your account nearly in half. Recovering from that kind of drawdown is like climbing Everest without oxygen.

Start with less. Survive longer. Thrive more.

The Kelly Criterion: A Mathematical Approach to Sizing

In the 1950s, a Bell Labs scientist named John Kelly developed a formula to maximize the long-term growth of bets. It’s used today by everyone from sports gamblers to hedge funds.

The Kelly Criterion answers a fundamental question: What fraction of my capital should I risk on each trade to optimize returns while minimizing the risk of ruin?

The formula:

Where:

• W = Win rate (as a decimal, e.g., 0.6 for 60%)
• R = Reward-to-risk ratio (e.g., 2 for 2:1)

Example: If you win 60% of trades and your average win is twice your average loss:

That means, in theory, you could risk 40% of your capital per trade to maximize long-term compounding. But in practice? That’s a recipe for disaster.

Rule of thumb: Most professional traders use a fraction of Kelly—typically 1/4 or 1/2—to reduce volatility, protect against estimation errors, and preserve psychological resilience.

Adaptive Risk Management: Listening When the Market Whispers

In aviation, pilots constantly adjust altitude, speed, and heading in response to weather. They don't fight the wind—they fly with it. The same principle applies to trading. Your strategy doesn’t exist in a vacuum. It performs within an environment shaped by volatility, trend strength, liquidity, and sentiment.

Too many traders treat risk like a fixed number—1% per trade, set in stone. But seasoned professionals know that risk is dynamic. The amount you risk should evolve with market conditions, just as a pilot recalibrates controls mid-flight.

🔧 Pro tip: Adjust your risk in sync with the market’s alignment to your edge.

When the market is moving in harmony with your strategy—say, a strong bull run if you trade momentum breakouts—you can lean in. This doesn’t mean throwing caution to the wind, but slightly increasing your position size can allow you to capitalize on high-conviction setups when probabilities are in your favor.

Conversely, when conditions are choppy or sideways, and your edge weakens, the wise move is to tighten your exposure. Reduce position sizes. Wait for cleaner setups. Survive until conditions improve. As Warren Buffett put it, "Be fearful when others are greedy and greedy when others are fearful"—but also, be smaller when the market is confused.

This isn’t speculation—it’s adaptive risk management, rooted in the understanding that variance is a two-way street. Just as athletes taper intensity based on fatigue and recovery, traders must modulate aggression based on volatility and structural alignment.

Preparing for Drawdowns: The Inevitable Descent

In mountaineering, climbers often descend before they ascend again. Trading is no different. Drawdowns aren’t failure—they’re part of the terrain.

A drawdown is the decline from a peak to a trough in your trading equity. It tests your resilience, your patience, and your belief in your system.

• A 10% drawdown requires an 11% gain to recover.
• A 20% drawdown? You’ll need 25% to get back to breakeven.
• A 50% drawdown? That’s a 100% gain just to catch up.

Survival isn’t about avoiding drawdowns—it’s about preparing for them.

Strategies to endure and recover:

• Keep position sizes small enough to absorb multiple losses.
• Use stop losses religiously, not emotionally.
• Don’t revenge trade—you’re not owed a win.
• Track your emotional state in a journal: it will show patterns even your charts don’t.

As psychologist Antonio Damasio demonstrated, emotion is not the enemy of decision-making—it’s the compass. But in trading, it’s your job to check the compass twice before following it.

The Hidden Costs: Where the Edge Gets Eroded

Imagine winning a chess game by outsmarting your opponent—only to lose because each move cost you $5.

Every trade has invisible costs:

• Commissions and fees, particularly for high-frequency strategies.
• Slippage, where fast markets execute your order at a worse price than expected.
• Liquidity issues, especially in thinly traded assets where entering or exiting at size can move the market against you.

All of these chip away at your edge. Ignore them at your peril.

Behavioral Biases: The Mind’s Hidden Traps

Daniel Kahneman and Amos Tversky, pioneers in behavioral economics, showed us that humans are predictably irrational. Traders are no exception. You’re not just battling the market—you’re battling yourself.

Common psychological pitfalls:

• Loss aversion: Feeling the sting of a $100 loss more than the pleasure of a $100 gain.
• Overconfidence: Doubling down after a hot streak, just before the fall.
• Recency bias: Believing the last three trades define the next one.
• Confirmation bias: Seeking only data that agrees with your existing position.

Tools to outwit your inner saboteur:

• Follow a written plan—the paper doesn’t lie.
• Use alerts, checklists, and review routines to enforce objectivity.
• Practice mindfulness and detachment—this is not your identity, it’s your craft.

Building and Testing Your Own Simple System

Great traders don’t predict the future. They design systems to respond to it.

Start simple:

• Buy when the 10-day moving average crosses above the 50-day.
• Sell when the 10-day crosses below the 50-day.
• Risk 1% per trade with a stop below recent support.

Then track everything:

• Win rate
• Average win and loss
• Maximum drawdown
• Emotional notes

This turns your strategy into a living experiment—one grounded in data and reality.

Mental Resilience: The Trader’s Invisible Edge

In elite sport, physical talent is the baseline. The separator? Mental strength. Trading is no different.

Mental resilience is the ability to stay grounded during turbulence—whether it’s a brutal losing streak or the euphoria of a winning run.

Here’s how to build it:

• Stick to your plan even after a series of losses.
• Avoid overtrading to “make it back.”
• Regularly review your journal for patterns of self-sabotage.
• Step away when emotions spike. The best move might be no move at all.

Top performers—from Olympic athletes to elite traders—use journaling not just as a performance log, but as a mirror. A well-kept trading journal reveals patterns you can’t see in real time.

Closing Reflection: Play the Long Game

Real-world trading isn’t about calling tops and bottoms. It’s not about knowing what comes next. It’s about having a system that survives uncertainty, a mindset that absorbs pressure, and a process that improves over time.

You won’t win every trade. But if you manage risk, adapt to the environment, and learn from your mistakes, you don’t have to.

In the end, success isn’t found in prediction—it’s found in preparation.

Because trading isn’t about being right.

It’s about staying in the game long enough for your edge to work.