A reader emailed me to bring up the importance of position sizing after my post on objectives. He also gave me two interesting articles on the topic from the October and November issues of Active Trader Magazine. I recommend you read the articles before continuing.

I didn't totally believe the authors story about the results of the marble game so I modeled it in Excel using a Monte Carlo analysis. Here is the complete model for you to test out (It has many functions to recalculate with random() so be careful when opening it). Basically the article was absolutely right, you can actually make more money if you risk less of your capital on each trade.

Since it's a Monte Carlo model the results are random, but here's a typical set of results:The charts on the left model a group that risks 16% of capital on each trade, the middle is 8%, and the right models the results of a group of individuals who risk only 4% per trade. The top row of charts are the ending money of each individual in the group, and the bottom charts are the average capital of all group members after each marble comes up.

It is not surprising that the number of people in the red (below the starting money) is the most for the group that risked the most and the least for the most conservative group on the right. What is surprising is that the group of people who risked 8% had among them more big winners (dark green) than the 16% group, which had none (no dark green on the pie chart). So you can actually win more by betting less, and therefore lasting longer.

Please leave a comment if you'd like a more complete explanation of the Excel workbook. If you change the number in the cell labeled "Change" then it will give you new results for different position sizes.