The Psychology Of Trading – Position Size

One of the most overlooked and misunderstood areas of trading is the psychology of trading. I am a firm believer that once a trader has a firm grip on their “psychological being” that the daily trade entires and exits, and the significance of any individual wins and losses soon disappear into the sunset – as the larger picture (ie…making a living at this!) begins to take shape.

One of the absolutely  most effective ways to “harness the demon” and wrangle those emotions – is to trade small.

I’m not talking “kinda small” either like……you still go to bed the night of the trade with a lump in your chest ( all be it a touch smaller  than the night before ) and your heart is still beating like a rabbit ( as opposed to a hummingbird ) I’m talking “super small”. Focus on your emotions for a week, and completely disregard any idea of “getting rich” or even that of making any money at all – and consider the following:

Would you rather trade a single (micro) contract with a full 200 pip stop (essentially risking $200.00), and wake up in the morning to see that:

  • You are still in the trade ( and have not been stopped out ) – as the 200 pips has afforded you some breathing room when things are volatile.
  • You are a “teeny tiny” ways into profit, with the option to close the trade – or perhaps tighten your stop and let things develop further.
  • You are a considerable ways into profit. Woohoo!
  • You are a fraction in the “red” and see that your current account balance is down a mere 30 – 50 dollars, and that perhaps news has broken – or something fundamental has shifted, and have option to reassess, close or add .

OR:

You traded a full 10 contracts with a 20 pip stop ( again risking the exact same amount of money ) and wake up in the morning to see :

  • Of course you’ve been stopped out without even giving the trade a single day to develop / move learn more about the markets direction, no option to add to the position, no idea of what news may have effected further decision-making and……down -200 smackers.

The smaller trade ( regardless of its immediate outcome ) has afforded you a much better sleep, less chance of heart attack, a myriad of further trading options and some very important insight into your trading by allowing you to watch it develop – and just as much likelihood of profit!

Take a full week and take your position size down to near “0”, observe market action in real-time, and you will learn plenty……….not to mention sleep much better.

And hey…”news flash” – you didn’t get rich this week either! – Surprise! Surprise! – Get it?

13 Responses

  1. timfrectio June 22, 2013 / 10:13 pm

    ah .. Yucatan gorrila is comeback. Lets talk your plan about paid service. Before you gone again suddenly . Thanks

    • Pot Stock Watch June 23, 2013 / 7:19 am

      It’s Go Time TimFrec! And the paid services area should be up and running here very very soon.

      I hope you are doing great – get ready for another crazy week!

  2. schmederling June 23, 2013 / 3:24 am

    ahh….. risk management key to survival in this game…… when the going is good great….. but there will always be a flip side waiting around the corner to move one 2 steps back…… also managing the losers & winner.

    Fear & Greed are the largest movers in this arena IMO – manage those along with risk & one will soon realize & see increased capital into one’s PF.

    I continue to suspect that 2013 is all about the above – those that are able to survive this period will be around to play the game as we continue in uncharted territory & a massive shift into a new paradigm. ( Transfer of Wealth )

    Cheers Schmederling

    • Pot Stock Watch June 23, 2013 / 7:22 am

      You’ve got it Schemd, and yes 2013 ( and even 2014 ) are likely going to continue “shredding accounts”.

      Good ol fear and greed indeed – the killers.

  3. fuzzybid June 23, 2013 / 6:10 am

    You scared me a bit with you last post kong.
    Luckily you not gone your blog helped me already so much. Hope 1 day i can buy you a margerita in playa del carmen.

    Fuzz

    • Pot Stock Watch June 23, 2013 / 7:27 am

      Well not to worry Fuzzy – I was a little “ticked off” I guess that I’d been posting / preparing for the recent “downward action” – and that when it happened so many people where “caught off guard” and “stunned”. Not as much here at the blog but just in general across the board.

      I’d hoped that perhaps a few more people where listening that’s all.

      I’ll take you up on that Margarita some time for sure!

  4. tio June 23, 2013 / 8:54 am

    Back to short aud/usd, nzd/usd, aud/jpy, nzd/jpy and cad/jpy, with mini lot 0.01. 20 troop entering the deck for my heart attack training. With fresh water here not margarita

    • Pot Stock Watch June 23, 2013 / 9:06 am

      Nice Tio – I am similarly positioned, and going easy here only in that it’s so late in the game for AUD.

      When something has come this far….as much I feel the fundamentals suggest far lower….I’m still just a little cautious – and will be trading/watching closely this week.

  5. Superpositron (@superpositron) June 23, 2013 / 12:13 pm

    Ahhh…. One of the biggest things that destroy noobies is the leverage on an under capitalized account. Noob + Leverage + Tiny account = Margin Call. My middle name used to be Margin Call. One of the traders in New Market Wizards was quoted as saying that his trade sizes are so small that it doesnt matter.

    • Pot Stock Watch June 23, 2013 / 12:15 pm

      Thats kind of what I was hoping / getting to with position size – if they are so small that you really don’t care about the outcome, it can really go along way in changing your “view” of things – and help with the psychological.

      Trading “small and wide” suuuuuuure gives a forex trader a much better chance.

      • tio June 23, 2013 / 10:17 pm

        yup … it made me 300% last two month. Only trade 0.01 lot BUT sooooo many troop and the result is wild. Do you want real proof ????? i can email my trading log someday here.

  6. Devil Yell June 24, 2013 / 9:41 pm

    Superpos wrote:
    Ahhh…. One of the biggest things that destroy noobies is the leverage on an under capitalized account. Noob + Leverage + Tiny account = Margin Call. My middle name used to be Margin Call. One of the traders in New Market Wizards was quoted as saying that his trade sizes are so small that it doesn’t matter.

    AMEN Superpos!!!!!
    Been there, done that, and died a thousand deaths.
    I think it goes like this:
    1. I bought the dream because the sales pitch was great (quick and easy money).
    2. I paid my “tuition” to the guru (maybe $4000).
    3. His shit was a recipe for disaster and I lost a ton in addition to the tuition.
    4. I began my search for the holy grail at every forum on the web, every recommended reading list, and I bought the lucky coffee mug, lucky mouse pad and lucky crystal ball.
    5. My charts looked like a bowl of spaghetti and I still lost my ass.
    6. You mean I can’t trade a $5000 account and never work again??!!!

    You and Kong nailed it. Every noob should learn this as Lesson 1.
    Instead, they learn all of the holy grail shit and most do not have the will or the skill to get to work and learn what markets, market mechanics, and trading are really about. (The details are not overwhelming but too much for now.)

    I’ve been banned from several forums (Forex Factory, Traders Lab, Elite Traders) for posting this kind of editorial. I was Drill Instructor nasty but maybe omitting “shit”, “piss” and “fuck” would have preserved my subscription.

    • Pot Stock Watch June 24, 2013 / 10:23 pm

      The damn forex biz! They need to promote education and money management principals first!

      But no…..the industry is built on “smash n grab” with the promise of fast money with tiny investment – it’s too bad really, as the industry gets a bad rap – I’ve been fighting it for years as people often think ” I must be up to something…oooooh forex! ” shady! ”

      What do they think banks do every single day?

      There’s a forex guy in every bank / and major company on the planet…..oooooh shady!

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