Trade small and trade often

trade small trade often

Can your portfolio handle a loosing streak of 4, or more trades? Every trader will experience that a few trades goes bad. Of course it doesn’t happen to you, but would your portfolio survive? Or would you be nearly broke if 4 trades went south. That is why a trader should always trade small. It costs a long time to recover from such losses.

We consider ourselves as statistical traders. As statistical traders, a fundamental aspect of the trading strategy revolves around selling options with high probability of profit. Another aspect is the number of occurrences This means that the number of trades we enter is using the buying power in the trading account. We want to have the highest number of occurrences possible. This allows for statistical probabilities to play out.

When using a variety of complex strategies, positions, and different underlyings, we theoretically have the ability to choose our rate of success by selling options that have a certain probability of success.


Probably make money

Probabilities only work when the number of occurrences is high enough to make them statistically significant. The more occurrences, the more accurate the probabilities are to predict the outcome of events. Since our trades are based on probabilities, this is a very important point.

One of the most important keys to trading is positioning ourselves in a way that probabilities work in our favor. There is mathematical evidence supporting the argument that eventually,  trading probabilities work in our favor. That is why we trade probabilities much more than directional opinions. However, in order to take advantage of probabilities, a trader needs enough (occurrences) trades on the board.

If you roll a dice ten times it could be that you did not throw the number 6 at all. If you roll the dice 100 times you might throw it.


Number of Trades Important?

So, how many trades do we need exactly? And what is “often”? Jenny tends to trade three to five times a day. Currently, she’s maintaining about twenty different trades. But is twenty positions right for everyone? Not necessarily.

The fact of the matter is, “often” is somewhat subjective. However, we can quantify it somewhat. Tom has discussed many times keeping somewhere between 20% – 30% of his account value invested. When volatility is higher, he gets more aggressive. Perhaps that percentage will jump as high as 50%. Therefore, depending on volatility, we want 20% – 50% of our capital invested. That is a starting point for how much money we want in play. Step two, trade small, helps us with allocating those funds.


What does Trading Small means?

Trading small might mean several things. Perhaps, as James mentioned, small means trading in products proportionate to your account size. Jim gave the example of selling one strangle in SPY. The buying power for one strangle is around $4,000. That trade might be appropriate in a $100,000 account. On the other hand, in a $20,000 account, that trade is using up too much buying power.

When too much buying power is allocated to a single position or even just a few positions, that account is too concentrated to gain any statistical edge. Jenny emphasized the importance of this point when she said that you never want to have one product or position monopolize a trading account. If an account can be made or broken by one position, the position is too big.

As a general rule, allocating about 1% – 2% of buying power to an individual trade makes a lot of sense. Those are “small” trades. By keeping trades small, we have the ability to create more occurrences. Creating those occurrences is where we gain a statistical edge.

Trade small, trade often is really one single idea. “Small” is what allows for often. “Often” creates a statistical advantage of being profitable. Trading small and trading often leads to profitable trading.




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