Some say that the thing that matters in bed is ‘the motion of the ocean’ and not ‘the size of the boat’…
Yeah, but lots of motion on a tiny boat doesn’t really sound like a good thing!
Forget about what you’ve heard before. In trading, size really matters!
I always thought that what defines you as a good trader is not your actual account size but the size of your trade positions and your ability to use them to your advantage.
Let me clarify this point further. Trade size is directly correlated to the risk of that position. The more size you have, obviously the more risk you are taking at a given trade. Most good traders chose not to go full size in a position but keep adding to a winner. In this way, you can just risk the profit and have a nearly risk-free trade. But we all know that, life is unfortunately not that easy and trades go against us. In this case, the importance of the trade size once again come to play….
if you are in a loosing trade, you simply have two option. Cut the losses and move on or add to your losers. Most people will (correctly) argue that adding to your losers is the worst thing you can do. I do agree but this is only true if you can not manage the trade using correct trade size and if you have a relatively small trading account that you can’t have a meaningful position.
As I have mentioned this a few times on my Twitter posts, if the trade is making you nervous (A bit of nervousness of course normal, what I am talking about is being very nervous / being scared) then you should be out of that trade immediately. You might be nervous because you are now in that trade and just explored something you didn’t know (I.e bio company just had its phase 3 approved or something similar and in this case you haven’t done your homework before entering in the short trade) or the stock is moving against you and you are getting nervous because of your financial losses and you simply can’t wait or swing the position due to your financial position. This is once again your fault. You have entered in a trade and you are now simply ‘praying’. Think about this – would you be this nervous if you had 10percent of the trade size you currently have (I.e. 300 shares instead of 3000 shares of that stock).
if I can advise you only one thing, it would be this: enter in the trade with an amount that you can afford to loose even if it goes to three times your full trade size. So if your full trade size is $5k are you ok and comfortable to loose up to $15k on that swing? If the answer is no then you need to go for a lower full size whereever you are comfortable. This keeps me in check (so my full sizes are always manageable compared to my full account size) and helps me to decide where my exit should be if it keeps going against me. Statistically very few trades that I go into really goes three times my full trade size hence they end up profitable trades (of course choosing the right stock plays a big role on this…)
Of course everyone is different, you should decide what is the most comfortable size for you where you can comfortably trade a stock and swing if it needs more time to do what you plan it to do in the first place. so next time before going in to that trade, think about the trade size first, at what level would you be comfortable if (and when) it goes against you…
now you know size really matters! And what to do with it!
I hope it helps.