Market Measures

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Position Sizing | Defined Risk

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment focuses on position sizing and defined risk, specifically how to avoid placing yourself in a position in which a bad run can ruin your account. We frequently preach the virtue of staying small. This segment will give you a better idea what that means and why we believe that.

The tastytrade philosophy of trading focuses on high probability trades, trading small and trading often. We believe this because we are convinced that a disciplined trader, holding to these trading rules, can stay in the “game” longer and will have a better probability of success.

The question then arises as to what trading small means. How does a trader know if the size of a trade is too large? It depends on the probability of success on the strategy we are using. Probability theory.can help us decide.

Here is an example you want to avoid. The probability of a trade with a 50% probability of success going wrong five consecutive times is 1 in 32. or just over 3%. A trader risking 20% on such trades can be wiped out. That’s not smart trading. It’s not that likely but it happens.

Our research team created tables showing different probabilities of profit and what the odds were of different consecutive losers. Tom and Tony show you what is a realistic “small” number and how to radically decrease your odds of destroying your trading account by choosing high probability trades and keeping it small.

Takeaways:

We believe in probabilities – but consecutive losses can happen. It is therefore important to not risk too much in individual trades

Consider the probability of incurring a number of consecutive losses and what that would represent as a percentage of your portfolio

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista to understand why we believe in the takeaways and the detailed results of the study testing position sizing and probability of success. This segment should convince you of the tastytrade theory of trade small, trade often.

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