Scoring Big is BAD

I'm sure a lot of traders would respond to that statement with a "what are you nuts??". I will repeat - going for the big win and scoring massive profits is NOT good for trading. But let me clarify that.

I can tell you for a fact that many "traders" score big one day gains, by taking oversized positions outside of their normal trading routine. I've experienced that a few times myself. But in the early days of my trading, I would generally find a way to end up trading away practically the entire profit within a short period of time. The reason for this is that generally speaking - for novice traders, a big score only creates a false sense of confidence, often leading them to scale up their trades and lose all sight of risk management in subsequent positions. I'm sure many of you can completely identify with what I'm saying. In fact, I would even go so far as to say that any trader that in the course of a normal day ends up making an enormous profit 5-10x beyond their "average" daily gain is NOT managing risk well and will most likely blow up. I encourage traders to actually be concerned whenever they see such a large (yes, even positive) fluctuation in their portfolio.

As I continue to reiterate time and time again, trading is not a game of playing the lottery. CONSISTENCY and the ability to crank out an expected gain with each trade. If you find that your trades constantly take your portfolio to unexpected levels (up or down), you're probably taking positions too large for your trading tolerance.

Make your trading boring. The best traders will tell you that trading is a boring activity. They see setups come and go all day long and will even pass them up on a regular basis. The only way to make trading boring is to take positions of a small enough size. This is the first step. As I read in a book by Jesse Livermore, if you're having trouble sleeping due to the size of your positions, "sell to the sleeping point". That point is actually quite distinct for each person depending on their individual capitalization, etc. Make yourself comfortable in the market. If you're in the market to "have fun", be prepared to lose.

Jesse Livermore was a great trader back in the early 1900's. He made $100 million in 1929 by shorting the market during the crash. It's hard to imagine how much that would have been worth in today's dollars. However, within 20 years, his wild trading led him to lose the entire amount. His life ended when he shot himself. He obviously did not follow his own advice. If you ever get the chance to read his book "Reminiscences of a Stock Operator", you will notice that his method of building astronomical positions placed him in extremely precarious situations. By the way, if you'd like to read his book, do a search for "Jesse Livermore" at http://www.wikipedia.org/. I think the book is free. It's an intriguing read, but I beg to differ when it comes to his trading style. However, the book is filled with amazing insights into the world of large traders.

"Big" gains and "big" losses are one in the same. They have no place in the portfolio of an experienced trader. There are a number of people who have recently blown up their portfolio with the hiccup we experienced last week. You often hear of a trader suffering a big loss and then subsequently go "all or nothing" in an attempt to recoup their losses. And we know how that can turn out. Large positions tend to give rise to larger positions and so on. When you score "big", ask yourself - how did this happen? Were you trading within your limits? Often you'll find the answer to the question is no.

As a note of encouragement to anyone who experienced major losses last week: Even if you suffered a major haircut in your portfolio, you will be surprised just how quickly small, consistent gains can add up to big gains in a very short period of time. Make your trading boring - it's a good thing. In fact, it's probably the only way to stay around. Unfortunately many traders do not survive this part of the learning process.