Why do I recommend
small lot sizes?
There are happy traders who say these things:
“The markets aren’t hunting for me. I’m part of a large
trading community. I know that losses are normal part of doing any business. My
winnings are on the way.”
“I know that the volatility in the markets is normal. It’s
what has brought me gains.”
“Trading has become my calling! I trade with peace of mind
because my losses are small and easily recoverable.”
I’m totally satisfied with whatever the markets give me –
whether more or less. I just need to focus on risk control. Profits will take
care of themselves.
Sadly, there are also suicide traders who say these:
“That’s me, always perspiring profusely in this severe
winter, and that’s whenever there’s a small movement against me.”
“Why does the market always move against me? Who’s my enemy
out there? Contend, O Lord, with those who contend with me; fight against those
who fight against me.”
“The fluctuations of the markets are fluctuating my heart!”
“Can you see? Another loss. That’s enough. I can’t continue
like this. I can’t take it anymore.”
If I use 0.01 lots per trade on a small account and make 500
pips in one month, my profits would be about $50 (whereas it would be $500 if I
use 0.1 lots). Someone who uses 1.0 lot per trade would’ve made approximately
$5000 from a gain of 500 pips. 10.0 lots would’ve then brought approximately
$50,000 as a profit. I’m not saying that I can’t use big lot sizes, but it’ll
be on sizable accounts, not relatively smaller accounts. Recently, someone in
Russia made 3500% profit in less than one week! Isn’t that attractive? Isn’t it
a most welcome opportunity if you can increase your account 35 times in a week?
We can see that higher risk enables us to make more money, but the demerit is
that it can also bring huge losses when a trading strategy enters a protracted
losing streak. Only small sizes can make one survive that kind of protracted
losing streak.
For many years, I’ve always advocated the use of very small
lot sizes when trading. This is
mandatory for keeping one’s portfolios safe permanently. Nevertheless, I’ve been
derided for using minuscule sizes. Those who recommend big lot sizes won’t ever
tell you how many accounts they’ve blown. They may have more experience than me
and have better strategies than I’ve. Yet, when it comes to risk management, I
believe I’ve improved a lot. There were great traders in the past who’re no
longer trading. Why? They often betted too big in the markets that couldn’t be
predicted with absolute assurance. If you can’t sleep because of open trades,
if you can’t leave your PC screen or you’re crying or extremely anxious, then
what you’ve risked is too high.
When negativity is considered against positivity, it’s
common for people to double or treble their risk after taking a loss, so as to
recover quickly. Many traders feel that the bigger their position sizes, the
bigger their profits. This mindset is wrong. The factors that can help grow
your portfolios over time are conservative risk control, discipline and small
lot sizes. Certain people feel that smaller position sizes are tantamount to
smaller stakes, which reduce their income. Do you also want to use the RSI to
build your new estate? There’s an illusion of having huge gains when fat lot
sizes are opened, though the real uncertainty comes from the inability to ride
your positions for as long as possible, even with clear negativity. In
addition, we go against the norm when we think the only way to control risk is
to cut our profits quickly. Still, an effective speculative strategy can
receive a margin call if position sizes are too large.
Stop losses also must be physical and rigid. We surmise that
there are new trading setups which come up every day – always. There are always
new opportunities in the markets. As it always will be with small sizes, trades
that hit stops would merely bring small and therefore, bearable losses; and
this is the usual way to push a portfolio from the recent drawdown to the
eventual increase. It’s the anticipated increase that overrides the recent
drawdown. My personal positions sizing
ideas aren’t the most commonly accepted, yet I’ve always remained triumphant,
no matter what the market does. The ideas that make you triumphant irrespective
of what the markets do are great ideas.
We’re no robots which got no emotions, yet we tend to master
irrational emotions as we gain more experience in the markets. When you risk
too much, you’ll attach excessive importance to every open position no matter
what – so you need to change this attitude. The art of speculation should be
approached with some form of rationality; it’s not your whole world, for there
are other things in life those matters a lot, so every open position is not
your life. When you keep your lot sizes very small, and they don’t eat your
account with small unfavorable fluctuations, you’re fine. When those lot sizes
are very small and perpetual and loss trades don’t make you cry, that’s when
you’ll be able to control your emotions. Approach everything with rationality,
treat each trade with a degree of sanity, and cut how much you risk drastically
if you’re going gaga. Once again, cut how much you risk drastically and be
responsible for that. Put a limit on how much you risk per trade, put limit on how much your risk per day or per
week or per month. When you do this, then you know your maximum loss in a given
period, and you’ll be satisfied with whatever the markets do to you. Yes,
you’ll be OK.
Great traders know that those who often bet big are suicide
traders. This article is concluded with the insightful quote below:
“Do not risk more than 0.5 to one per cent of your
capital per trade at the beginning. Less is often more. If you are used to the
strategy and you have traded it over a longer
period of time you can vary the risk and maybe even
increase it. But you have to take the drawdowns of the strategy into account
which increase with the higher risk. Be aware of your total risk: It is the sum
of the open risk of all active positions. Your total risk
should not be greater than 2.5 to five per cent – then
your capital will not decrease too much if you have several losing trades.”
– Julian Komar (Source: www.tradersonline-mag.com)
Azeez Mustapha
Market Analyst, Trading Signals
Provider and Coach
Eye-opening trading lessons: Lessons from Expert Traders
