Risk Management · Lesson 13 · Advanced

Sizing by Performance

You size countercyclically: smaller during losing streaks, and deliberately not bigger after winning streaks.

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Size countercyclically

Jones: When I'm trading badly I always use smaller size, so I trade my smallest when I'm at my worst. The catch-up game is deadly.

The most dangerous time is after wins. Cognitive ease weakens System 2, and risk gets underestimated. Discipline is hardest right after a winning streak.

Check off your sizing ladder before you scale back up.

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The key points at a glance

In losing streaks reduce size or pause, don't fight back.
The most dangerous time is after wins, that's when you underestimate risk.
After a drawdown return with tiny size, then scale up step by step.

Deep dive

Trade smaller after losses, not bigger

The instinct after two or three losses in a row is to win the money back fast, so you go bigger. That is exactly the deadliest move in trading.

Schwager calls this pattern 'losing begets losing': losing breeds pessimism and worse decisions. Sizing up now multiplies you at your worst.

Paul Tudor Jones: when you are trading badly, keep cutting your size.
Ed Seykota calls the catch-up game literally lethal.
Marty Schwartz shrinks to a fifth or a tenth of his size after a heavy loss.
On 1,000 USDT: instead of 10 USDT of risk, drop to 1 or 2 USDT.

The most dangerous time: right after a winning streak

Almost every Market Wizard names the same pattern: the biggest losses come right after the biggest wins. After a streak you feel competent, you underrate the risk, and your checks get sloppy.

Weinstein lost 600,000 in five days because he wanted to make a fixed amount of money and went far too big to get it. A new equity high is not a free pass, it is a warning sign.

A concrete sizing ladder for everyday trading

Set the ladder in advance, while your head is neutral. Triggers hang on numbers, not on feelings: 'I feel good again' is not a reason, a documented streak that followed the rules is.

Base risk: 1 percent per trade.
After two losses on the same day: end the day.
After a heavy drawdown: restart at 0.25 to 0.5 percent.
After a new equity high: leave the risk unchanged.

Sources: Schwager, Elder, Kahneman, Taleb, Douglas

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