An Amazing Discovery

How many positions do you trade at the same time?

trading successWhen I started trading in 2000 I was taught to find a good trade and get size. “It’s better to have one big position…”

I believed it, the guy sounded smart and he was persuasive. It’s bullshit. Here’s why-

Trading is about probabilities, not whale hunting. Sure it sounds great to hit a big trade, and then brag about it. The problem with this advice is risk and sample size.

You are accepting incredible risk on a one-shot trade. This guys focus was on the profit side, and how much we could potentially earn if that one trade worked out. It was basically all-in.

A huge problem with this concept, especially for new traders, is that you don’t have enough experience to make that decision. How is a new trader supposed to know what a great trade looks like? At that stage we are still learning how to read the tape and place orders.

The second dimension to this BS advice is sample size and experience. New traders should seek experience and feedback, not profits. I know that sounds counterintuitive but hear me out.

A few years back I started using a software that forced you to build a list of stocks before you ran scans. You needed to actually create a fake position, so I bought 100 shares of every stock to build the “portfolio.” Within a month the 100 share positions showed a positive $4,375.

 

I have to be honest, I wasn’t paying attention to the P&L because that wasn’t the reason I built the portfolio but I was stunned. My mind started to race. “How is this possible?”

The deeper I looked in to the positions I saw there were winners and losers, but the total was positive. My only thought was WTF…

So I wrote in my journal, “If trading is about probabilities, let’s purposefully trade to a large sample size, of my best trades. Let’s take every trade that matches my criteria, for only 100 shares.”

The results were mind-blowing, but not in the way you are thinking. Yes I made money, but my stress level was gone. I no longer felt naked watching one position. No longer was every uptick or down tick life-or-death.

I was managing the aggregate of the positions, not the one trade. It was bliss, but it got better, my negative days became dramatically smaller because I was accelerating my sample size of good trades. 

The odds were in my favor (because I understood tape reading and order flow) so I was speeding up my probability cycle by executing ten perfect trades in batches.

Professional betting is a good analogy for trading, in this context it’s spot on. Why do casinos have thousands of tables and slot machines? They have an edge and they want the edge to play out as often as possible.

I am not saying you should start trading 6-10 positions at once today, but once I started to embrace this concept everything changed.

A fantastic side benefit of this comes in the form of stress. You’ll have the least amount of shares when trades don’t work out. And the most amount of shares when you do. 

Think about implementing this concept. You will be glad you did.

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