My Take On Optimal Position Sizing

A subscriber recently asked me about my take on position sizing, and more specifically using Optimal f. For those unfamiliar, Optimal f is a calculation derived by Ralph Vince which computes the optimal position size that would lead to a portfolio’s fastest growth rate. Mr. Vince has written several books on the subject and I do recommend his work.

Here’s my take on using Optimal f (or any other position sizing formula for that matter).

Optimal f may be the mathematically optimal size for a position IF the trades are managed in an optimal manner. For many people, positions of “optimal” size feel aggressive. While our perception is often that we have a large edge on a particular trade or strategy, the edge often isn’t THAT great. In order to maintain your edge you need to be able to trade the strategy in an “optimal” manner. Whether the strategy is automated or discretionary doesn’t matter. You need to be able to take entries when they trigger. You need to be able to take exits when they trigger. But just as important and sometimes most difficult is you also need to be able to SIT when there is neither an entry nor an exit triggering.

The sitting can often be difficult when traders have what they perceive as a large position that they are managing. Many traders have a tendency to want to manage the trade more carefully with large positions. This may mean tightening stops sooner or taking partial profits a little quicker. Doing this “feels” good and it may get the trader to a breakeven level faster, but in the long run it will almost always either reduce or destroy the edge of the strategy. Tighter stops and quicker profit taking effectively means more losers and smaller winners. Few strategies can withstand more losers and smaller winners and still look good.

Optimal f may be the mathematical optimal size, but in my view the optimal size is the closest you can get to Optimal f and still execute your strategies as they were designed – while keeping your sanity.