Understanding your span of control is essential for knowing the maximum number of trading positions you can have open any single time. Sometimes span of control is the limiting factor in the number of open positions. Sometimes it is trading capital available. Sometimes it is your maximum allowable portfolio heat.
Your portfolio heat means how much you would lose this moment if every single position you have open went immediately against you at every stop loss you have triggered. The amount of money would lose in that duration divided by your total portfolio, expressed as a percentage, is your current portfolio heat.
As a rule of thumb, a trader should not have more than 20% portfolio heat at any given time.
For short-term traders, overnight portfolio heat is more difficult to estimate, since you have to account for exceptional gap moves against you.
If you can improve your span of control, however, you can afford to have more open positions with smaller relative risk per position, still be within your maximum portfolio heat, and therefore reduce the probability of ever experiencing maximum single moment drawdown.
Here are some things you can do to improve your span of control:
- simplify your rule sets
- rehearse contingency situations
- use automatic trailing stops to manage open positions
- trade symbols you are familiar with
- identify the main themes of the day, week or month and stay with them
- improved speed of execution
- automate information gathering
- improve the speed of your decision-making
- reducing the amount of information required to act
- stop believing that you are right and look at what’s happening now
By improving your span of control, you will improve trading performance and lower your per trade risk. It’s important to know where you are and how to improve with your active trade management.