Friday, April 25, 2014

Trading Realization - "Trade Small and Trade Often"

I had a realization today.  My desire to be a 'perfect' trader was holding me back.  I have had a  pretty good run the last 2 months, in trading.  Having no losses on any trades, I thought I finally cracked the markets.  I was trying to be perfect and did not want to lose any money on a single trade.  While I know this is unrealistic, I tried my hardest to achieve this because of my personal ego to always be right.  

The problem with this is I had to take positions that had 'unlimited risk'.   It would only be a matter of time before a blow up.  As a good predictor of price action, I was simply lucky with my results so far.  I know I need to manage my risk, so it was time to try a new strategy.  

I also wanted to build up my IRA accounts and in those accounts you can not enter into naked positions.  All trades need to be covered or cash secured.   So how can I build my retirement accounts?  I have to hedge every options bet and limit or define all unlimited losses. 

I never like the idea of hedging my bets, since the cost of the hedges really eats into your profits, but what I realized is that without these hedges I am subject to huge potential losses and statistics say that it will eventually happen and be order of magnitude than many some gains.  

So while the cost to hedge is high, the probability of profit is also high.  So I have to make up for the hedges by simply trading more and make up any losses in my volume of trades!  Sure, I statistically should lose 20% of the time, but the 80% of the time should be winners.  So my new saying is "Trade small and trade often!"

The 80% win rate should guarantee a profit at the end of the month, even with 20% losers.  The losses should be contained as long as you keep your trade sizes about the same.   The key is to maintain the same level of trading and don't over extend yourself.    As soon as you do, the market will go against you and you will have to start all over.  Stay disciplined!

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