Last time I talked about tilting and its severe effect on our trading mind. While being wrong can stir our sensitive ego into an excited mode; there is nothing more inciting to tilting than a position size that is larger than you can handle.
And I’m not talking about the size of your wallet. Sure, you can have a huge wallet but your mind may not be able to handle the psychological effect of the losses due to your position being too large. What most people forget is that the size, like leverage, cut both way.
With a position size larger than you can handle, a small negative turn of the stock can appear to be quite large and uncomfortable to you in term of the losses or profit give-back you are witnessing. Sure, it all looks good when the stock is heading in your favor; who doesn’t like to see the profit multiply in spade? But the moment price action turns the wrong way and you don’t act fast enough, you will not only give back your profit, you will lose more than you are prepared for if you don’t have a hard stop to protect yourself.
The problem here is that the moment your trade has done well on the get go; most people cannot handle the give-back of the profit when the stock corrects. They are seeing green, why should they close out their position to cut losses or break even when there is still possibility of green later on?
Mentally, it is much harder to take a small losses when you have already seen paper profit earlier. There are two things working against you:
- You regret not taking your profit when you think you should
- You don’t like to take losses in such large amount (due to your over-sizing position) even though the stock only corrects within the daily ATR (average true range).
The first item is usually the most common and the remorse can be quite debilitating to your mental stage; sometimes to the point of impairing your normal trading process.
The second item above compounds to your mental stage from the remorse and may push you to tilting if you do not act to stop the bleeding when price continues to go against your position.
Over-sizing in your position can blind you to the true direction of the price-action. By being more fearful when you normally would not when you are holding a normal size position, your emotion causes you to lose the objective observation of the price action. You start to see thing that isn’t there.
From my experience on the SP500 trade I discussed last time, when I saw the losses that was six times more than my morning win, I couldn’t handle that sudden turn of event so I tried to double-down to make it right. The interesting thing was that, hindsightwise, I was correct all along in the overall direction of the SP500 trade. I was just wrong on the extent of the retracement. If I had given my position more “room” to breath with a 2% maximum stop loss from my original size, I would have made a killing by the end of the day. But my doubling down after seeing my third trade turned into a losses exceeded my comfort zone in the position size department, I lost my objective perspective of the price action. Not only did I lost perspective, I lost my ability to apply money management by cutting my losses before it got me to tilt. If I had just walked away from the losses even though it was six times my first win, it would still be a manageable losses. Perhaps a 3% of the portfolio instead of 15% I ended up with.
But it is easy said than done when you see unexpected losses due to fast market or your hesitation to act that are larger than the normal losses you allow yourself. If you happen to have a large position size when the sudden turn of event happens, you are one step away from tilting.
After I took my volunteered hiatus from trading to find myself, I realized that in order to play this market to win, I need to be honest with my strengths and weaknesses.
I see my strengths as:
- being quick to act
- finding stocks that fit my trading style
I see my weaknesses as:
- susceptible to tilting
- easily spook
So when I came back to trade, I began to tailor my trading style according to my strengths and weaknesses. Knowing that I am susceptible to tilting, I swear off averaging down when I’m losing. Knowing that I’m easily spooked, I will cut my losses quickly by taking advantage of my strength to act quickly.
I also started to build up my tolerance for position size. In other words, I would start small and then build up the size in incremental level over a period of time so that when I was losing; it would not affect my objective observation.
Remember, position size is a very personal matter so you have to be truthful to yourself. DO NOT ever compare your position size to anyone else. What is big to me may be peanut to someone else and vice versa.
You have to find an optimal position size that will allow you to see the truth of the price action even though you are sitting on a loss. Trust me, in time, your optimal position size will increase as you start to bank coin following your successful trading system.
For those who have been reading my ego series, you know there is a catch.
What is the catch?
Before you even get to the issue of finding your optimal position size for your trade, you need to do the following:
- master your thought process to develop your trading mind
- master your focus to help your trading mind overcomes your natural mind
- master your chart reading skills with the technical tools that fit your trading style
- understand your strengths and weaknesses so you can form a trading style that increase your ability to trade successfully
Only after you are proficient in the above steps do you even have to worry about your optimal position size. In the meantime, trade small until you get the hang of it. Otherwise, you may become another number that support the statistic that only a few percentages of the trader can ever win consistently in the market.
This is my final post on the Where Ego Dares series.
Ain’t you forgetting something?
Oh, you mean how can I forget to talk about greed when we are dealing with the subject of ego?
I’ve already discussed greed in my prior post so it will be redundant if I bring it up here again. Please click here to re-read it if you want.
Hope you all enjoy it.
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Great post Zen!
Thats exactly what goes thru my mind when I trade to big. I gotta keep working on my discipline.
Thanks for the feedback.
You will be surprised how most of our “trading problems” are fixed once we dialed down the size of our position. Suddenly, everything seems to be so much clearer…