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Trade Small… Save Big
The Smart Profits Report: Issue #363
Wednesday, October 18, 2006
Trade Small… Save Big: The Single Best Piece of Trading Advice Ever
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research
In today’s fast-moving and volatile market, there are now more traders than ever before. Volume on the NYSE has soared 495% over the past decade - from a daily average of 403 million shares traded in September 1996 to 2.4 billion today. That means two things:
- Investors now face fiercely increased competition for profits.
- With so many new investors (who often lack the proper investing education), you need to be even more aware of what you’re doing, since they can add to volatility… and erode your profits.
So today, I’m going to offer you a truism - a remarkably simple, yet powerful message that is perhaps more important today than at any other time. Trade small and save big while you’re learning.
The last thing you want is to plunk down a large amount of money when you’re starting on a new system or strategy, only to see it evaporate as you learn to trade it.
One Case Where A Few Singles Are Better Than A Homerun
I’ve given that advice to literally thousands of people in person, and to hundreds of thousands in print. And one of the benefits of being a trading coach, and speaking frequently at seminars and conferences is that I’m able to get instant feedback on what I teach from attendees.
And in all my years, I’ve never once had someone come up to me and say, “You know, D.R. - I started trading with that system/strategy/newsletter, but because I was trading in small amounts, your advice has ruined my life.”
On the other hand, I’ve had many people tell me that trading small has “saved their bacon” and prevented them from absorbing a big loss. I wrote the same advice in an e-mail last night to a new investor who was struggling with exactly that issue.
It’s not rocket science… but from a psychological standpoint, you’d be surprised just how difficult this strategy is to implement. Here are a few reasons why - and what you can do to overcome it…
Trade Small… Save Big
Ever wondered why it’s sometimes difficult to do something that seems logical and rational and that’s best for you? Because it can be boring! It’s often more exhilarating to go with your emotions, and feel the rush. But when investing, it’s dead wrong.
Here are the issues with trading small - and how to beat them:
High Excitement Trading
It doesn’t matter whether it’s a new trading system, new hobby, or new relationship. When you start out something new, your excitement is at its highest. Same goes for investing. It’s our natural response. And much of that excitement stems from the profit potential of our new strategy. So when the rational parts of our thought process chime in with “trade small while you’re learning,” it dampens the excitement and enthusiasm.
The thing is: Many people choose to cling to the excitement and toss away thousands of dollars in losses when they could have easily limited those losses to hundreds of dollars and gotten the same experience and education just by trading smaller sizes. Use restraint and common sense.
Paying Too Much Attention To Trading Expenses (eg. Commissions)
The most frequent comment I hear about trading small is, “I’ll never be able to cover my commissions if I only trade a few shares. There are two ways to overcome this problem:
- Start out trading with a broker who charges “per share” commissions (or low per contract commissions for options traders). There are plenty of reputable brokers like Interactive Brokers, TradeStation and CyberTrader who charge very low “per share” commissions.
- But if you like your broker who is charging “per transaction” fees, then re-frame your commission costs. Set up an account that you will use to pay for commissions until you can prove to yourself that you can trade a new strategy profitably over time. Then you can evaluate the system and your ability to execute it properly based on trading results, exclusive of commission costs. Once you can trade effectively and profitably, you can then gradually ramp up your size per trade.
Missing The “Big Trade”
This is another of the more frequent reasons given for not trading small when starting. “Man, I nailed that trade… but could have made even more if I’d invested more. I’ve lost all of that potential profit.” While that could happen, most of the time, the opposite happens, and you could find yourself in a big losing trade - or a string of them.
And if you do that while trading big sizes, you’ll get crushed - both financially and psychologically. It’s much better to make a modest profit on one or two nice trades than it is to lose a huge amount while you figure out your trading psychology and whether a system fits you or not.
Whether you’re new to investing, are trying out a new system or options strategy, or just aren’t sure which way a trade will go, it’s critical that you exercise common sense when deciding how much to invest. Trade small at first, and you’ll save yourself a lot of financial headaches.
Good Trading,
D.R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- One of the most important keys to being a successful investor is being able to trade with confidence. If you don’t have it, you’ll always be second-guessing yourself. I examined this often overlooked concept, and gave some crucial tips for developing your trading confidence in Smart Profits #323, Trading With Confidence: How You Can Develop More Confidence In Your Trades.
Related Articles:
- Position Sizing: The Most Powerful Investment Concept
- Price Shock: How To Respond To Three Types Of Price Shock During Earnings Season
- Trailing Stops: How to Give Your Options Room to Grow
The Chart of the Week
Once again, Intel (Nasdaq: INTC) makes it into “The Chart of the Week.” As the company releases its quarterly earnings, Goldman Sachs’ downgrade of the stock sent it down almost 3% today. If it breaks below $20, beware. This will be a clear signal that semiconductors in particular, and the tech and broader markets in general, will be under severe downside pressure.
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