Are You Trading Too Big?
The market tends to expose our every weakness. Whether it’s emotional extremes, a lack of preparation, or simply being stubborn, trading will reveal your Achilles’ heel!
One common mistake we all make from time to time is trading too large of a position. This may be the case when an account is too small, or it may be a product of the market you’re trading and whether or not there’s ample liquidity to allow for entries and exits with minimal slippage. Sometimes trading too big can mean trading your normal size in an overly-erratic market. While there are several factors involved in trading too large for your own good, focusing on realizing when you’re trading too large can be quite helpful.
Here are 3 clues that you’re trading too big:
If you’re adding on trading size because you’re on the wrong side of a trade, you’re trading too big. Why add fuel to the fire when you’re wrong? It costs money and you’ll often come out of the other side of the trade not knowing which way is up! Compounding one mistake with another will often lead to even worse performance, so focus on working your way out of the first bad trade without adding to it.
If you can’t sleep at night, you’re trading too big. The phrase “sell down to the sleeping point” is often used but for good reason. If you walk away from your screens at the end of the day and all you can think about is the trade you’re in, then it probably means too much to you. Lighten up on your position, and you’ll usually find greater clarity which leads to profitable decisions.
If you are acting like a baby, you’re trading too big. Screaming at monitors, smashing keyboards, and banging on your desk is for toddlers, not traders. If you’re not acting rationally, then it’s time to cut down that trading size. I’ve been on a number of trading floors and witnessed this behavior, as well as been guilty of some of it myself. Such actions indicate that emotion is in the driver’s seat rather than logic, and that’s a huge disadvantage in trading. Trading plans should be in place to direct your next move, but how can anyone follow a logical plan when they’re busy throwing a temper tantrum? I don’t ever recall my own or anyone else’s childish behavior leading to a good day or rescuing a bad one! If this sounds like you lately, take a breath, lighten up on that position size, and get back to your game plan.
Position sizes should be increased when you’re trading well, not struggling. Cutting down position sizes during times of frustration will allow you to get your confidence back and find some clarity.
Wait for your mojo to return before you step back up to full size, and while you wait, focus on trading well rather than P&L!
President, The Stock Bandit, Inc.