AJ Brown: How to Use Position Sizing to Mitigate Risk
Do you know how to calculate position sizing to mitigate your risk? Do you have a risk management framework in place so that you don’t suffer large losses? Today's guest on How To Trade It—A.J. Brown—points out that inexperienced traders have to learn how to mitigate risk and position sizing is a great strategy. To learn more about how to protect your investment account and make smart options trading decisions, don’t miss this episode.
A.J. grew up just outside of Washington, D.C. His Mom instilled in him at a young age the importance of investing—she even had him buying treasury bonds at the age of 6. By the time he was 11, he was riding the metro to the treasury department. He attended the Thomas Jefferson High School for Science and Technology and went on to get a bachelor’s and master's degree. Listen to this episode to hear how he took his expertise and dove into trading and founded Trading Trainer.The @tradingtrainer joins me in this episode of How To Trade It to talk about how to use position sizing to mitigate risk. He also shares his trading strategy and what you NEED to master to find success. #stocks #trading #StockMarket #Investing… Click To Tweet
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You’ll want to hear this episode if you are interested in…
- [1:17] A.J. Brown’s background in trading.
- [8:13] The importance of a guide/mentor.
- [13:43] A.J.’s options trading strategy.
- [17:10] Why you need to calculate the worst-case scenario.
- [19:32] How to calculate your position sizing.
- [25:22] Long-term money management and success.
- [31:46] The most important things to master to be successful.
- [36:26] How to get some FREE trading resources.
Why is it important to have a trading mentor?
A.J. shares that learning how to invest properly is like learning how to drive. You learn how to drive from an instructor and they’re typically in the seat next to you. They have a steering wheel and brakes to mitigate risks if and when necessary—ready to take drastic action. They answer your questions as you gain experience. When you switch with another student and observe from the backseat, you learn even more.
Just like driving, you benefit from learning how to trade alongside an instructor and other traders engaged in the process. While it’s a lot of trial and error, you also have someone alongside you to make sure you don’t make mistakes that end in huge losses. A.J. notes that “guided “discovery” begins with getting clear on WHAT you want to learn. Then, you find someone who has done it and learn from their mistakes. Get in front of your trading platform with an instructor and go through the moves. Sometimes, simply taking action and executing trades is the best way to learn.
A.J.’s options trading strategy
A.J. utilizes a variety of trading strategies: directional, volatility, range-bound, time-premium strategies. Everything he does involves trading equity options against stocks, ETFs, and indexes. With the volatility of the market, he’s focusing on standardized and predictable variables. He sets up a range-bound position and allows it to go through its expiration date. He makes the difference by selling the premium and either buying it back or letting it expire. It minimizes some of the worries about the unpredictable market.
A.J. doesn’t consider himself an active trader. Rather, he sets up conditional order entries the night before and then follows up on everything the following evening. He’s adamant that you NEED to plan ahead and then execute your plan. Trading platforms make it easy to set up and walk away—and avoid dealing with the fear of missing out. The next evening, he’ll assess what the market has done and tweak his position if necessary. His average trading day is 20 minutes to an hour and making his money work for him.Learn the @tradingtrainer typical options trading strategy in this episode of How To Trade It! #stocks #trading #StockMarket #Investing #DayTrading #StockPicks #options #OptionsTrading Click To Tweet
Position sizing begins by determining your worst-case scenario
What is your worst-case scenario risk vs reward? Seeing what the potential reward would be is nice, but A.J. points out that experienced traders count their rewards after the trade. Before you execute a trade, you should focus on the risk. It’s what sets newbies apart from successful investors. You want to assess: What is the worst that this trade could be? What is the risk associated with that? Then you'd determine position sizing to keep your risk in check. You must also determine the price target that you need to beat when you complete the trade.
How to calculate your position size
A.J. often sees new traders learn a certain strategy, follow it religiously, and do well and start to earn money. They gain confidence in their strategy and start taking more risks. But all of a sudden something will change in the market and they lose all of their gains—and half their portfolio. A.J. shares: “If you’re doing your position sizing right there’s no way you can lose half your portfolio.” So how do you calculate position sizing? A.J. calculates it by taking the max allowable risk to your portfolio divided by the worst-case scenario trade risk.
To avoid making costly mistakes, he recommends sticking to a maximum level of risk. If your portfolio is less than:
- $5,000: Risk no more than 4%.
- $5,000–$25,000: 3% risk.
- $25,000–$250,000: 2% risk.
- $250,000 + should risk no more than 1%.
If you risk 4%, you’d have to make 25 crappy trades in a row to lose your portfolio. He recommends stopping and reassessing your strategy well before you hit that mark (at 3 poor trades). You must also avoid trading with your emotions—because the market doesn’t care how confident you are.
In the remainder of the episode, we talk about long-term money management and finding success and the most important things you must master to be successful. Listen now to hear our in-depth discussion about his trading strategy.How do you calculate your position size? Listen to this episode of How To Trade It with special guest @tradingtrainer to find out! #stocks #trading #StockMarket #Investing #DayTrading #StockPicks #OptionsTrading #options Click To Tweet
Resources & People Mentioned
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