Position Sizing for Practitioners [Part 3: A Portfolio Approach]

“Diversification is the Only Free Lunch”

I’m sure everyone has heard this old adage at some point in their trading career. Most people probably shrug it off and go back to watching The Big Short and dreaming of putting on that one career-making trade. Or maybe they’re still trying to figure out how to pick every single top and bottom on one instrument, thinking all they need is that one perfect strategy. The idea of concentrated bets and being right is just so sexy. Compare this to trading a basket of strategies across styles, time frames, and asset classes. Hopefully the thought alone hasn’t bored you to sleep. Because what I hope to prove with this post is that diversification can combine multiple small edges into a portfolio with both reduced risk AND increased reward . This was a true turning point in how I thought about trading, and hopefully it will be for you too.

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