Trade small and realise more profit
Are you familiar with baseball? It’s a popular sport in several countries.
The basic idea is that a pitcher throws a ball at a batter, whose goal is to hit the ball. If he does so without the defensive team catching the ball, the batter will advance to a base.
In baseball, one of the best things a better can do is a home run. This occurs when the batter hits the ball over the fence on the perimeter of the field. When this happens, the batter automatically scores a run.
But in order to hit a home run, the batter must swing very hard. This often leads to the batter missing the ball completely and instead getting what is called a strikeout.
The harder batter tries to hit a home run (also known as “swinging for the fences”), the greater the risk of the batter striking out. Therefore, many batters try to simply hit the ball and move to first base instead.
So, what the heck does this have to do with Options trading?
Simple. Continually attempting to make huge profits on every trade, rather than settling for consistent, smaller profits, is the same as swinging for the fences. Don’t do it.
You picked your stock from your watchlist and are ready to trade. Trade small and trade often. I know…It sounds easier said than done. The average option trader will be too stubborn to trade small. They’ll want to make the big money right away…lose discipline and eventually blow out their account.
To do this thing right, you’ve got to trade small and learn from your lessons. Unfortunately, most individuals don’t have that type of patience.
“Many novice traders think this is a get rich quick business. It’s not. It’s a get poor quick business if you don’t control risk and your emotions.”
– Gary Savage, Smart Money Tracker
Especially for people who are starting with any type of trading and doesn’t have a large account they need to be cautious in their trading. They should have a Trading Plan with a Trade Small and Trade Often strategy.
Everybody has an amount of money to trade with. Some has more money than other. Regardless your account size, how do you decide how much money to use for each trade? You don’t want to allocate too much capital in one trade and have the risk of loosing it.
TRADE SMALL using single contract spreads on few dollar-wide strikes so your losing trades don’t lose you that much. Many small profits will make up a big account.
TRADE OFTEN so the higher number of occurrences gets the “law of large numbers” mathematical theory to work in your favour. Have a lot of trades on at any given time as your account balance allows. Don’t risk more than half of your account size at risk at any given time
Your long-run odds of success are much better if you routinely risk $70 on each of ten trades rather than $700 on one trade.
Click on the picture below to watch the video about Trade Small and Trade Often.
If winning and losing trades were evenly distributed trade size would not be a big issue. The problem is that winning and losing trades will often run in streaks. No trader knows how bad their worst streak will be until it happens and large position sizes can hurt your account balance during these streaks. Unless you trade size is small, loosing a few trades at a row will not ruin you. Better to win regularly than to loose big every other trade. A lot of small profits let your trading account grow.