Trade small when learning

Je viens de retrouver ce papier de Barton qui correspond à l'article d'hier pour le trader novice

The Psychology of Trading Small While Learning

by  Barton

Trade small while you’re learning.

I wrote that again in an e-mail last night.  And as usual, I was defending that sage bit of advice.  One of the interesting benefits of teaching seminars with Van and others is that I get to hear feedback on the items that we teach.

I have given the recommendation from today’s title to literally thousands of people in person and to hundreds of thousands in print.  Trade small while you’re learning.  A simple message.

Yet, I have never once had a person come up to me and say, “You know, I started that new account (system, strategy, or whatever) and because I was trading such small size, your advice has ruined my life.”

But on many occasions I have had people tell me that trading small while starting out has “saved their bacon”.  This isn’t rocket science.  But trading small is very hard to do from a psychological standpoint.  Here are a few reasons why:

·        Excitement is at its highest when we are just starting something new.  It really doesn’t matter if it’s a new trading system, a new hobby or a new relationship.  Our natural response is excitement.  And part 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.  Many people choose to cling to the excitement and give away thousands or tens of thousands of dollars in losses when they could have limited those losses to hundreds of dollars and gotten the same experience and education just by trading smaller sizes.

·        We get caught up in trading expenses – especially commissions.  The most frequent comment I hear about trading small is “I’ll never be able to cover my commissions if I only trade 10 shares (or 100 shares).  There are two ways to overcome this problem.  Start out trading a broker who charges “per share” commissions (or low per contract commissions for futures 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 a broker who is charging “per transaction” fees, then re-frame your commission costs.  Set up a mental or real “tuition 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 properly then you can ramp up your size per trade (not jump up in one big step!).

·        What if I miss the “big trade”?  This is another of the more frequent reasons given for not trading small when starting, “I might hit that big trade but just have a few shares, and will have lost all of that potential profit”.  That could happen, but 99% of the time the opposite happens.  Through an execution error or a psychological misstep, you find yourself in a big losing trade when starting out.  Or a string of them.  And if you do that while trading big size, 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 half or more of your account while you figure out your trading psychology and whether a system fits you or not.

Trade small while you’re learning:  useful instruction for new traders and also for experienced traders learning new strategies or systems.  I hope you will choose to learn your new strategy while paying the minimum tuition instead of the maximum!

Great Trading!