A Practical Guide to Position Sizing for the Toby Crabel ORB Strategy

Position Sizing: The Neglected Key to ORB Success

While much attention is given to entry and exit signals, position sizing is arguably the most important component of a successful Opening Range Breakout (ORB) trading plan. Proper position sizing ensures that you can withstand a string of losses without blowing up your account, and it allows you to maximize your gains during winning streaks. Without a sound position sizing strategy, even the most effective entry and exit signals will ultimately fail.

Fixed Fractional Position Sizing

A simple and effective position sizing model for the ORB strategy is the fixed fractional approach. This involves risking a fixed percentage of your trading capital on each trade. For example, if you have a $100,000 account and you decide to risk 1% per trade, your maximum risk per trade would be $1,000. To calculate your position size, you would divide your risk per trade by your stop loss in dollars. For example, if your stop loss is $2 per share, your position size would be 500 shares ($1,000 / $2).

Volatility-Based Position Sizing

A more advanced approach is to adjust your position size based on market volatility. When volatility is high, you would reduce your position size to account for the increased risk. When volatility is low, you would increase your position size to take advantage of the tighter stop losses. A common way to measure volatility is with the Average True Range (ATR). You could, for example, set your stop loss at a multiple of the ATR, and then calculate your position size based on that stop loss.

The Interplay of Risk Management and Position Sizing

Position sizing and risk management are two sides of the same coin. Your position size determines your risk per trade, and your risk per trade determines your potential for both profit and loss. It is important to find a balance that you are comfortable with. A more aggressive trader might risk 2% or more per trade, while a more conservative trader might risk 0.5% or less. The right position size for you will depend on your risk tolerance, your account size, and your trading goals.