February 05, 2008 at 11:49 am | | Comments 8

Step up the Risk Ladder

Improving as a trader will include many things for you. Sure, you’ll learn to evaluate market conditions better as time goes by, and you’ll find better ways to respond to trading situations which in the past may have caused you to panic. As you improve, even your repertoire of trade types will increase as you add more advanced approaches like gap-fill plays and reversals. However, possibly the most important aspect of becoming a bigger and better trader is learning to increase your trade size effectively.

I’m a big believer in the notion that if you aren’t making money trading small that you won’t make money trading big. That concept sets the precedent here, so if you’re struggling to produce profits trading 100-lots, don’t even think about getting to 1000-lots. If you’re in that boat, keep refining your approach and set aside the notion that you should be trading bigger. You’ll know when the time is right.

Ready For More

When you’re consistently getting your P&L in the green, it’s probably time to start trading a little bigger. And while it’s easy to see on paper that simply quadrupling your position size may mean 4 times the profits, in reality it doesn’t usually work that way. After all, there are those pesky nerves to deal with!

The idea of multiplying the size of your profits is indeed an exciting one, but remember to approach everything first by way of risk management. Just as there are losing trades on smaller-sized positions, there will of course be losses on larger ones as well. Making certain that you can not only withstand larger hits to your account, but also the potential loss of confidence which could come as a result of larger-sized losses is imperative. Being “ready” to trade larger doesn’t simply boil down to having a bigger account which allows more buying power – it really comes down to your ability to accept increased levels of risk.

Baby Steps

Most experienced traders would agree that it’s not usually a great idea to find success at 100-share level or $100 risk-per-trade level and then jump straight to 500. The best approach is to incrementally add risk as you get more comfortable with the bigger numbers you’ll see on that P&L screen. Those good intentions of becoming a more profitable trader can get you into trouble if you jump too quickly into the deep end of the pool before you know how to swim well. A big increase in trade size puts your confidence to the test, and you want to be ready for that. Confidence is tricky in trading, as you have to have it to operate, but too much of it can cost you your objectivity. Protect it at all costs, and you’ll be glad you did.

If you’re considering bumping up your trade size, think of it as a ladder. Climb each step one at a time, and only move up to the next one when you’re ready. That approach will serve you well, letting you slowly add risk as you are comfortable so that you can keep making good trading decisions. Those good decisions don’t come from impulsive reactions to your P&L – they come from following your game plan for each trade. Patiently growing your trade size will help you stay focused on your trading plan, which is where profitability is rooted.

Remember, trading is a marathon, not a sprint, so be sure to sep up the risk ladder at a pace you can maintain.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Risk, Investing, Swing Trading[/tags]

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  1. Anyone know where I can get a good overview of day trading?

  2. Hey Gary, check out this page for some day trading concepts:

  3. Gary
    Have you tried

  4. Thanks Bob good info? – who is lemonshell anyway?

  5. I also found this on Forex trading

    Thanks everyone

  6. Before scaling up, you should probably also make sure you are consistent in various market conditions. Some industries have 10 year cycles and unless you have felt all the ups and downs, scaling is always a little dangerous. It’s probably a good idea to scale slower than your buying power allows.

  7. Great point there O.S., consistency across various conditions is definitely a requirement for anyone looking to bump up their size. And I’m in full agreement that staying well within one’s buying power is a very good idea.

    Thanks for the comment!


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