Position Sizing Feedback

Feedback from a reader:

“While the idea of sizing one’s position according to anticipated volatility and available capital sounds reasonable on the surface, recently it appears that all markets in all countries are well correlated. Thus in the current environment position sizing doesn’t manage risk very much. For example, if all your appreciating positions decline as simultaneously and deeply as they appreciated, what’s the use trying to allocate risk with a 1% thimble? Look at metals for example. Why bother diversifying among the commodities and producers with position sizing? The same result would have been obtained by simply exclusively buying any one of gold, copper, or zinc alone. Diversity among exploration companies and types of metals with [trend] trading position sizes just makes a messy portfolio. In the end they all sold off more or less at the same time and by roughly as they appreciated compared to 100%. Let me explain a bit more about “compared to 100%”. I am talking about all available investments being well correlated in the sense of trend following. In Trend Following as I understand it, one seeks the 100% or greater return on investment in a few trades rather than trying to make small gains over many risky capital intensive trades. Furthermore, if you look at every stock exchange in any country that nearly any stock that went up also went down by a comparable amount relative to 100%. If you look at forex, it is ALL US dollar. Dollar goes up a bit, dollar goes down a bit.”

Selecting a portfolio to track and trade is not just guessing. Correlation must be considered and even then it is not a perfect diversity measurement 100% of the time. Sometimes, in the short-term, everything can quickly move together.

This reader continued:

“You need huge leverage to get a trend out of the US dollar chop. That’s not really trend following is it?

Trend following trading does not attempt to use vast leverage to make money in choppy markets. Period. Trend following loses money in choppy markets.

This reader continued:

“Is this the end of speculative trend following? If it’s not dead, maybe position sizing isn’t so important in the modern era of investing?”

How can the question of “how much?” ever go out of style? I am not following the logic.

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You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content.