The Value of Trading With Small Size

Don’t underestimate the value of trading with small size. You could find yourself on the receiving end of some significant range when you are patient enough to wait for the momentum opportunities.

Remember Gamestop, AMC? Sure those may be anomalies on the grand train ride that is the stock market over the last 25 years, but they happened. Even if you missed them, that’s fine.

There will be others.

Maybe not for the same reasons, maybe not exactly the same amount of range. But the point here is not to think the whole point of trading is to size up, size up, and size up some more because your account allows you to.

Or worse, the price of a particular stock on any given day is low enough and the stock is marginable, so by using all your buying power (including margin) you could get the biggest size position you ever had.

What is the point?

Don’t tell me it’s to make a huge homerun on that trade because, at the end of the day, you have no idea what is going to happen.

Every tick that goes against you is 10x worse when you are taking 10x the size your trade plan calls for.

But what are the factors that exist?

Is it the fear of missing out aka FOMO?

Is it greed?

Is it hope?

Maybe it is a combination of all of these emotions. Either way, you have gotten out of your element, away from your plan, out of your comfort zone thinking this is how you get to the next level.

Perhaps.

But it’s also a path to blowing up or taking months or even years away from your gains, all in one fell swoop.

When they say the struggle is real in trading, they are not kidding, although they wish they were. Small size should not be taken for granted. Its value provides peace of mind, patience, and the ability to trade without being emotionally attached to the position.

If you are wrong with a small size, you are much better off than being wrong with a full-size position. Many traders love to sell/cover right away as soon as they are in the money. But when they are red and losing, they tend to stick around and wait, and hope.

Funny because patience should be on the other side when your trade is working in your favor.

The problem is, no one wants to lose. They think the money is theirs already so if they see red, either not selling means psychologically they haven’t lost yet, or they are too convinced that they are not wrong and the trade will do what they want it to do.

So the adding begins, and the position grows as the trader tries to average down, instead of cutting the loss and reevaluating and perhaps reentering the trade by starting over with small size, they hold onto everything, ignoring the trend.

It doesn’t make sense when you read the words, but raise your hand if you have been guilty of having this sort of bias, and approaching a trade where you took (in hindsight) way too much size.

Seriously, 100 shares on a stock that moves $3-5 dollars a day. You only need to capture 10% of that move to make $50, assuming the stock had a range of $5 on the day.

Typically I like to be in the 30-40% range, so I would be looking to scale in and out of that particular trade for $3-$4 both on the upside and downside, depending on the key levels and what the chart and overall market were telling me.

Sure, 1000 shares, and you only have to capture 3-4% of the move for the same amount of money, but if your stop is set to 20% of the move, you stand to lose $1000 versus $100 dollars. So you risked $900 more to make the same amount of money.

Or you could argue you risked 10x to make 10x but when you have 1000 shares your emotions start creeping in and you don’t tend to maintain the level of patience you could have with 100 shares.

So if you get that $1 dip, before the $3 rip, you might take your loss only to watch the stock play out in your favor albeit without you in the trade.

That’s why I don’t trade with large size and I don’t mind trading with small size. It keeps gains small, but it also keeps risk small, and more importantly losses small.

I win on a lot more trades than I lose as well, so in the end, I feel it pays for itself, versus dealing with large P/L swings to my accounts.

So don’t underestimate the value of trading with a smaller size. You might find that you can still make a great living as a trader even if you don’t go big like some people want you to believe.