December 07, 2006 at 9:20 am | | Comments 2

Pressing the Big Button

Every now and then, that ideal trade comes along and you just can’t shake the urge to go big.

Now most of the time, I size my positions pretty consistently, only varying them when either (1) the market necessitates it, or (2) my recent performance necessitates it. But occasionally, I will see a culmination of several factors which leave me with that urge to “press the big button.”

Usually for me, this is an index-based trade done via ETF’s (like QQQQ, SPY, or IWM). That is by design, because I don’t want to jump out there with too much exposure to one particular name. Laying down the big trade in an ETF will greatly reduce and limit my gap risk, which is something that’s critical to do in order to manage risk.

Of course, there are times when going big is the wrong thing to do. I’ve talked before about when to trade aggressively, when to lighten up, and that you should never force trades. Those all still hold true, but when it comes to pressing the big button you’ve got to be sure your head is in the game. Do NOT go big if:

* You’re in the midst of a losing streak
* Your account is in danger of getting wiped out
* You’d be unable to withstand the financial or mental hit in case of a loss

So how do you know when it IS time to go big?

Well, you never know for sure, but here are a few things to consider:

(1) You DO NOT already have a position in the issue you’re considering. Ask any trader who’s been around for more than a few hours, and you’ll be reminded that most big losses come about from adding to the position when it’s already underwater. That’s a huge no-no, so entering a trade in which you have no pre-existing position will allow you to think more clearly on the front end.

(2) You have a defined exit plan. This goes for any trade, but it’s especially important if you’re thinking of loading up bigger than usual in a trade. Bigger trades mean bigger numbers, and that means bigger odds that you could get emotionally attached. Knowing your exit before you enter the trade will ensure that if your timing is off, you’ll be less likely to stick around and let the freight train run you over. Remember, the difference between conviction on a trade and respect for the market is a fine line.

(3) You can’t shake the feeling that a sizeable move is about to take place. Maybe several of your favorite indicators are all lined up and ready to go. Maybe market sentiment is reaching an extreme. The chart pattern is irresistable. When it’s time to go big, you’ll probably see ALL of these confirming the setup, and that will be your chance.

(4) A win would be worthwhile. At first glance, this last point is a no-brainer, but let’s look a little closer at your trade. When you compare what is at risk with what you expect to make if you nail the trade, it needs to be proper. Even if #3 shows that the stars are aligned, don’t make the trade unless you’re going to make several times what you’re willing to risk. Make sure if you’re putting on the big trade that you’ll be paid accordingly, and only play for meaningful stakes.

One of my favorite movies is Ocean’s Eleven. There’s a great scene where Rusty asks Danny why they should rob the Bellagio vault, to which Danny replies,

“Cause the house always wins. Play long enough, you never change the stakes, and the house takes you. Unless, when that perfect hand comes along, you bet and you bet big, then you take the house.”

When that special trade comes along and you know it, be willing to take down the house and press the big button!

Here’s to your next big trade!

Jeff White
President, The Stock Bandit, Inc.

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