The primary goal of every opportunity is to manage risk responsibly. Proper risk management helps preserve actual and mental capital. Our goal is to be extremely precise on initial risk to start position at optimal trade location. We then want to observe responsive activity and scale up and down against that entry taking base hits on core. Finally, we want to pile in risk if the “real move” begins to happen. We use P.O.S.A. as our order of operations.

P.O.S.A.

Put on Risk – This engages us to the trade idea. It should be small, about 20% of max size. The reason we start small is because this position is started buying low or selling high. We are fading the current direction to get some risk on at optimal trade location. We make a trade off here: put on risk at an uncomfortable moment in exchange for a very unfair price on our initial position.

Observe Response – We put on risk because we anticipate certain activity in an area. Once that activity is observed, we should be aggressively adding against our entry at optimal trade location. This means adding risk quickly to keep core position near optimal trade location.

Scale Up & Down – Once our core position is on, we want to take what the market gives us. We should take base hits when price moves in our favor.  We should also be happy to scale back in against our entry if given the opportunity. We can repeat this sequence with discretion.  Take base hits > add against entry > take base hits > add against entry

Add for Momentum – Part of our trade idea is the expectation of a move from our trade location to target(s). There may be an opportunity to add risk late in the sequence once certain structure is breached and finds follow through leading to a short burst of momentum.  When we observe both the breach and follow through, be comfortable “piling in” the trade.

Where we are dead wrong, we are done with the trade and reset, no immediate reentry.

“Leo, isn’t this just adding to winners and cutting losers?” Yes, in fact it is exactly that but this gave me a framework for how to execute that. It’s easy to say it yet difficult to do it in real life so this is the process I follow.

Sizing

It is important that we set reasonable expectations for ourselves when putting on a position. Not all trade setups are created equally. Some opportunities are better than others due to a variety of factors. When it comes to discretionary traders, no two are the same. We all have differences in style, personality, risk tolerance, and various other factors. Part of our job is to understand what conditions produce the best opportunities for our individual system.

When we are able to identify when the conditions are present that compliment our edge, we can be confident in taking a more aggressive approach to our trades. We want to press when our edge is at its best, so in these instances we will increase our trade sizing. Conversely, when the conditions for our edge are not present, we will be a bit more guarded and go on the lighter side for our trade sizing. The goal to approaching sizing this way is to adjust our sizing to be proportional to the quality of the setup and the overall conditions of the market.

There are rare instances where we really want to “smash” a trade. It is usually a situation where we are seeing all or most of the components of our playbook all pointing to the same action. We may experience a gut feeling that we have to be in this trade and we have to hit it very hard. We want to lean into this feeling. This is our experience and intuition subconsciously telling us to go big, we do not ignore this.

Max Loss Limit

Bad days come with the territory. Part of accepting risk is understanding that there is no such thing as “perfection” in this game. On days when things don’t go our way, it is imperative we cap out the amount of draw down we can have on any one session. This loss limit should be hard coded with your broker or in your software so that you get locked out when it’s hit. We are human beings and are susceptible to acting irrationally when emotions are high, this protects us from ourselves.