Trading Small to Make it Big
We’ve all probably heard that 90% or more of all traders wash out and blow up their account. [EDIT – sorry, this post turned into a bit of a rant…]
Hey, I’ve done it before…more than once.
In the end, it really all comes down to trading to large, risking too much, taking too big of a position. Some traders are sitting on a winning trading system, a solid method, but wash out and fail because their trade size was too big. In some of those cases, they might think that the system sucked, but taken over a course of hundreds, thousands of trades, it was a winning system. But they never got to find out because they traded too big and washed out.
From my past experience, I get it. A small sampling of my thoughts would typically be:
I want to make a ton of money. I want to make it now. I NEED to get there quickly.
If only I can get my account up to $100,000, then I’ll reduce my trade size and start on the path towards real wealth.
I know this trade is going to be a winner, I can just feel it. Let me load up!
My account is too small, it’s going to take forever to get big. This next big trade will get me headed in the right direction.
If I buy 2,000 shares, and the stock goes up .50 cents, I’ll have grown my account by 50%! Yep, I’ve gotta take this trade, it’s a sure thing.
Do you have the same thoughts now? Have you had simlar thoughts in the past. I’m betting the answer to that question is a yes. 🙂
It’s interesting, we trade to make money, right? Sure, I guess that is the end goal. But when you focus on making money, more often than not you will lose it. But when you follow a system, and use proper risk management and don’t focus on the money, over time, you are more likely to make money.
Focus on making money = losing money
Focus on not losing money = making money
Money is so fraught with emotion. It makes us humans to crazy things. And in trading, focusing on the money is a surefire way to lose it because the emotion…the fear and the greed – makes us do some real-stupid-ass-stuff.
- It makes us hold onto winners too long and all of a sudden the winner has turned into a loser.
- It makes us take profits way to quickly.
- It makes us hold onto losers and all of a sudden you become a long-term investor.
- It makes us sell too quickly, taking a small loss, only to watch the stock we just sold, turn and rocket higher.
Money makes us do these things.
It ruins trading…ironically enough! Even when we make it big on a winning trade.
So what is the solution? How do we take money out of it?
Of course that’s impossible because we need money in our account to trade with, but there is one way to drastically reduce the push and pull that money exerts on our emotions…and in the end: the negative effect that money has our trading decisions.
The way to do this is to reduce your trading size.
When you trade with a small position size, and the stock goes down 10%, but it hardly dents your trading account…that’s pretty small. That’s what I’m talking about.
You want your position size to be small enough, where a 10% loss on that position is almost like, “Ehhh, who cares?” That’s what I’m talking about.
But I can hear you….
“But Glenn, you don’t understand. I need to make money! If I trade so small, it’s going to take forever to grow my account.”
“But Glenn, you don’t understand. I hate my job and I need to quit soon so I can trade for a living!”
“But Glenn, you don’t understand. My account is so small right now, I need to trade big to get it to a more reasonable size so small wins mean bigger $”
And I can empathize…
But if you need to do this. You can do this. You need to trade small.
Remember, most traders end up losing and washing out of the game. Do you want to be the 90% that do?
Or do you want to be the 10% (and probably less) that are still around, trading years later?
Instead of focusing on the money you make per trade (whether that’s $10, $20, $200, whatever), focus on the long-term.
Make it so the current trade is not that important. It won’t make you and it won’t break you.
When you do that, you start to focus on the long-term strategy. You become more cold. More methodical. You view the current trade as one of thousands. You enter a trade and know where your sell-stop should be and guess what…you actually set it!
Sure it’s boring. If trading is exciting, you are probably trading too big. You need try to make it less exciting.
Exciting = BIG PROFITS and Exciting = BIG LOSSES.
Success as a trader rarely happens overnight.
Sure, some traders do turn a small amount into six figures or more. For them, it might not happen tomorrow or next month, but odds are, they will lose it all. Maybe not, maybe they have some special gift and can practically walk on water.
I know I can’t though, and odds are you can’t either.
Our goal is to be around tomorrow, to be around in a year, 10 years from now.
Let me ask you this…
Have you ever looked back to your past self and said,
“I wish I had only done this or that 10 years ago. If I had only done that one thing, I would be in such a better position today.”
I think we all have. Whether it’s to lose weight, get a different degree, change careers…whatever.
In the rush to trade big, to make it big, more likely than not you won’t.
In 10 years, you will likely look back and wish you had more realistic expectations.
- You will wish you had traded small and not lost it all.
- You will have wished you banked small profits, week after week, month after month, year after year.
- You will have wished those gains would have compounded.
- You will have wished you had a consistent system that you traded with hardly any emotion.
You want your future self to look back and be proud of your current self by how you traded small and became one of the 10%.
Why not do it now?