Lessons from Dr. Mansi: Position Sizing and Progressive Exposure
Simple, mechanical rules to manage your risk
As the market is going through a (healthy) pullback, I think this is a good time for a post on risk management. This also ties in nicely with the next video in Dr. Mansi’s “How I trade” series: “Position sizing, Progressive Exposure, Risk Management”.
Today’s notes are actually quite short, covering:
The importance of good position sizing;
Dr. Mansi’s rules for position sizing and progressive exposure; and
My concluding thoughts on why I think these rules are highly effective.
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The importance of good position sizing
At 00:29, Dr. Mansi says:
“In my view, position sizing is the most important thing that will determine your P&L.
“If you take a bigger position than you should, it can wreck you. And if you take smaller positions than you should, it’s not going to move your account. So this is, hands down, the most important part of your trading.”
However, this is also a poorly understood topic. Most new traders don’t put in the effort to learn position sizing, and textbooks aren’t helping by often covering this topic towards the end.
Position sizing and progressive exposure rules
Dr. Mansi discusses her position sizing and progressive exposure rules from 2:55:
When starting from a blank slate, the first trade risks 0.12% of your total equity/account (Dr. Mansi refers to this as ‘ROTE’ — ‘risk of total equity’). So, for example, if you trade with a 5% stop loss, your pilot position (i.e. 0.12% ROTE) should be 2.4%.
Gradually increase your exposure if your positions are working:
If two consecutive positions worked at 0.12%, increase ROTE to 0.25%.
If two consecutive positions worked at 0.25%, increase ROTE to 0.5%.
If two consecutive positions worked at 0.5%, increase ROTE to 1%.
Gradually decrease your exposure if your positions are not working.
If two consecutive stop losses are hit at 1%, reduce ROTE to 0.5%.
If two consecutive stop losses are hit at 0.5%, reduce ROTE to 0.25%.
If two consecutive stop losses are hit at 0.25%, reduce ROTE to 0.12%.
Don’t have more than two ‘risky’ positions at any time (i.e. positions where your stop loss is below breakeven).
Note that you can have as many open positions as you like (in fact, Dr. Mansi says “the more, the better”). However, the other positions must be ‘safe’.
By limiting your risky positions to two, you limit your intraday losses to 2%, if not less (when not at 1% ROTE per trade).
In a supportive environment, you have decent odds of at least one of those two positions working. By extension of that logic, if you’re stopped out of both positions, that suggests the market environment isn’t great. In conclusion, taking two positions is enough to give you fairly reliable information about whether the market is conducive to breakout trading. There’s no need to risk more than 2% on an intraday basis.
By extension of point 4, you can add a new risky position after making an existing position safe.
From 9:12 until the end of the video, Dr. Mansi demonstrates how these rules work in practice by using a spreadsheet. The spreadsheet itself is available here.
I do feel that it’s best to watch this part of the video for yourself, rather than rely on my notes only, to really see the steps Dr. Mansi takes — and, by extension, the point of progressive exposure — to ensure her account avoids dipping far below her starting point (cell B2, selected in blue in the screenshot above).
Remember: losses work geometrically against you. Letting them get out of hand makes it difficult to continue to make higher highs in your equity curve, which is ultimately your goal as a trader.
My concluding thoughts
I don’t think I’ve ever seen such simple and clear position sizing/progressive exposure rules as Dr. Mansi’s, so if you’re struggling, these are absolutely worth using as your starting point.
With time, you can adapt these rules as necessary, so they better meet your needs and are more suited to your individual trading style. However, I do think it a good idea to keep your rules as simple and mechanical as you can. This doesn’t just make life as easy as possible (for a trader, at least), but also ensures consistent results.
Feedback
I hope you found my notes helpful! If so, please do give this a like and share it with other traders.
I’m also always looking to get better, both as a trader and as a writer, so do let me know if you have any constructive feedback in the comments below. Alternatively, you can message me on X/Twitter or email me at kayklingson@yahoo.com.
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