Size Does Matter
Here is how this usually works. Trader enters the market because they want to make big money. Trader takes huge position sizes without ever establishing consistent profits. Traders account evaporates. Or trader loses on a trade then on the next trade adds more size than normal to recover previous loss and finds themselves in a deeper hole. Does this sound familiar? Yea, I’ve done it too.
Oversizing on positions prior to establishing successful trading behaviors creates several disadvantages. We all have what I call psyche cash. This is a dollar amount we consider to be a large trading loss. This amount varies between traders but its based off off your perception of normal gain size rather than the money itself. For example lets say that amount may be $100. One hundred dollars doesn’t seem like a lot of money but if your average gain is only $20 dollars you will need 5 wins to make up for that loss. It’s hard to be successful under that criteria. So from that view $100 is a large loss. What happens as a result of oversizing before you are ready is you end up reaching that loss threshold 3 times faster than normal and the more you stare at that debit the larger it gets. Then you start thinking “No way will I ever make this back” “Im screwed ” etc etc so you decide to end the pain by exiting the position. Then 20 minutes later the stock has moved in the direction you thought it would and you have no position just a huge loss.Yea, I’ve done that too
Also, oversizing leads to a higher state of anxiety and nervousness. That unsettling feeling plays tricks on your psyche and leads to poor decision making. This removes the focus and management away from the trade itself and places that focus on the money. Thats not where it should be. Not to mention oversizing before you have developed a pattern of consistency will probably lead to you running out of trading funds before you ever learned how to trade. Survival points count in the trading game.
Ask youself this. If your win percentage is lower than 55% or you are not profitable at least 3 out of the 5 days during each week you have no business trading with any size at all. Develop a pattern of consistency and ease yourself into larger sizes. View yourself as a Marathon runner. No one is telling you that you can not win the NYC Marathon but you are not going to get up off the couch and run 26 miles against trained professionals and win. You are going to have to start out at the bottom and work your way up just like everyone esle. Trading is no different
Doug