Trade Small, Trade Smart
by Ken Calhoun
Hi traders, we’ll look at the reasons why it makes sense to trade smaller share, contract or lot size and how to make improvements in your trading. The problem many traders have is that they trade too few positions on large size and take big stop losses, never realizing a more successful trading approach may help turn things around for them.
If you are like a lot of traders I have helped over the years, you may have found yourself making one of these three common mistakes:
1) trading only a few positions on relatively large size with big stops; for example 500 or 1000 shares with a four dollar swing trading stop loss; or 4-8 options or e-mini contracts at a time.
2) overleveraging by using margin to put on trades that are far too large for your account size (e.g. putting on a $5000 trade in a $10,000 account)
3) not trading frequently enough to give yourself a chance to make it. Remember, it’s a numbers game. In my swing trading accounts I may be trading as many as 20 to 30 positions at a time, with starting share size as small as 10 or 20 shares (aka ‘pilot’ trades).
Your trading profitability is a function of winning trades minus the cost of your stop losses. It therefore makes a lot of sense to diversify by playing a field of trades, then adding to the winners and taking very very small stops on the losers.
My approach, tested with millions of dollars of real money trades, also helps overcome fear and anxiety problems you may run into. Think about it. You’re not likely to lose sleep over a starting trade of 50 shares or one contract, right? But if you put on a 1000 share trade you’re going to watch it very nervously and worry about it from start to finish. It’s a much better place mentally to be as a trader to not care much at all about any starting position, until it proves itself a winner. That’s when it starts to get interesting and you can then build a trade of several hundred shares (or several contracts or lots).
It is a lot like when you are single and dating, where you may be going out with quite a few people at the same time, not overly attached to any one person, until you find a good match. Similarly, putting all your eggs in one basket upfront as a trader by undertrading is foolish; instead play a larger field and make the math work out profitably for you.
The worst way to trade is to trade just a few choppy, low volatility charts (or pop and drop hazardous cheap stocks) on large size. The smartest way trade is to find strongly trending high volatility charts on small initial size, and to trade a handful of them. You want to hedge your bets as a trader.
Your goal is to make a lot of money. You want to crush it in the markets, by grinding out lots of small incremental wins. The old saying about going for singles and doubles instead of swinging for the fences for home runs is absolutely true. It’s not as exciting to grind out lots of small trades, but it is the correct way to trade professionally. I hope that this helps you develop a winning mindset to trade small, trade smart in your own trades moving forward. I’ll see you at TradeMastery.com. Best wishes for successful trades.
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Thanks to all my traders, friends & colleagues — enjoy!
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