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Today I want to let you know to focus on trading small. And I want to show you why trading small is better and more beneficial.
It's more beneficial for you especially if you're getting started. But also even if you're more experienced, starting with a smaller size is better for you.
These are the main two points we'll cover right now:
- Why do we want to go big or trade larger?
- Why starting small is better?
When we look at going into a trade (for many people), we always want to go big. We want to trade large.
Why Do We Want to Trade a Big Amount of Shares?
- making more money
- having more free time
- building up our retirement savings
- getting to retirement sooner
- quitting your jobs
That's why we want to go big, but it works against us. It doesn't work in our favor to go large. There's a lot of issues that happen when you want to go large.
Some of The Main Problems
Few of those things are:
- emotional issue
- the personal side of managing money
- trade basis
That's because when you have large trades, you get more emotional about it. And it creates more and further losses.
The personal side of managing money also doesn't work out well when you get to your end destination very quickly. That's the case when it comes to like a lottery effect. If you've ever seen some of those people that used to be broke and then they all of a sudden win a $100,000,000. What happens is that within 5-10 years they're broke again.
The main reason is that they weren't ready for what the lottery had to offer. They weren't prepared for that change in lifestyle and personal management of things. Trading is step by step approach. The smart decision is going small, and little increments allow you to preserve that capital for the long haul.
Whereas if you went ahead and got one stock and it went up 900%, you could have made a lot of money. But your ability to keep that money is also limited.
Important note: Starting small and doing things in incremental is better for you in the long haul. You'll be able to preserve that capital for a more extended period. It allows you to learn and teaches you to manage that money a lot better.
These are the big picture concept. We can look at a smaller idea like on a trade by basis. You can start large on a trade basis and you all of a sudden jump in with so many shares. Well, if that stock pulls back, the losses that you incur are quite large- relative to your account size.
What you want to do is if you start with a smaller amount that pullback is not going to be as painful. When the bounce comes, when you get that acceleration, you can go ahead and add more. It creates more flexibility for you in managing that trade.
The bad news is if you go too big too fast you've put in so much capital already in one area. Then it's difficult to add more to the position as that stock becomes more favorable and valuable.
And then when you get that whip back, you make less. Because then you have to make up those differences if you went in all at once.
When you trade small, it allows you to add to that position when the opportunity comes. Pullbacks are opportunities that are creating more volatility in the market. More volatility creates more risk which also creates more opportunity.
It allows you to get in at a second point or a third point as those pool backs happen. The other thing that this does which I like is it also teaches you the education part.
Educational Aspect You Need to Understand
When you start small, it allows you to get into trades and build that experience and education without risking too much. You can't walk into a store and say that you want seven years of experience and building a house. You can't tell that you wish to three years of experience in accounting and seven years of experience in photography.
That's not possible. You can't walk into a store and say give me these things and here's $50,000. You can't ask for it to be delivered on a USB Drive through your wrist.
It doesn't work that way. We don't have the technology that does this. But you need to get experience by doing it. This is how you gain experience - by doing things physically.
Starting Small Is Clever - This is Why
When you start small, it allows you to build that experience a little bit at a time without risking too much. Because if you went in and we started trading fifty thousand shares that could be a huge lot size for your experience.
You're not ready to trade the fifty thousand shares. It could be $10,000. You might not be prepared. Start at the beginning, learn to trade five shares first.
As those shares go up into strengths, you take one or two off. Now you learn how the business works and operates. You learn patience, and you learn a lot of things.
That five shares you can always multiply it times a hundred, thousand, ten thousand and see what the result would have been. If you're worried about commissions, that's why you start small, and you can do the same thing in option trades. Start with three contracts and take one off in the strength.
Take your profit. Then as you build things out, you might go into seven shares or ten shares. You start ramping things up. If you're consistent with five shares, you go to ten. If you're consistent at ten, you might decide to go for twenty.
Then you might go to forty or fifty. You can go and jump to two hundred, five hundred or a thousand. And then you could go into five thousand if your capital and size and permits in your account.
Starting slowly with the share amount allows you to get that experience. And that's why starting small is better. There's a lot of benefit from the emotional side to just personal managing. Don't forget the trading basis.
This Is Why Going Too Big Isn't Great Idea
Going to big won't allow you the opportunity to add. Because you've used your capital, by going small or going tiny, you could go ahead and add to that position. And you can gain that experience which is number four on our list.
Human behavior: As humans, we want to go big initially. This is normal for us. We shoot for the stars. That's what we're trained for. That's what we're ingrained for.
But remember success is counterintuitive. If you want to be successful, you got to work at doing things that a little bit more opposite than what you're trained for.
Many people say you need to reach for your dreams and set big goals that you may not even achieve. But in trading things are a little bit different. Take the opposite approach. See what happens. If you're struggling right now and you're putting on trades, it's probably for this reason.
You might be going too big because you're trying to get to your end destination too fast.
Conflicts Inside of You That You Have to Confront
You might be going too big because you're trying to get to your end destination too fast. You're not ready for that yet, but you'll get there. It's partly because of greed.
Two conflicts are happening inside of you:
- there's a RISK YOU
- there's a GREED YOU
And they're both watching out for you. They both are looking for good things for you. The greed inside of you is pushing you towards your aspirations and your goals. It wants you to succeed. It wants you to achieve time freedom. It wants you to accomplish the additional money that you could make from trading.
You also have that fear side. The fear side protects you. It's watching out for you, so that way you stay safe and comfortable. That way things aren't disturbing your peace. All of that means that they're all doing good things for you. They're trying to work for your benefit.
What you need to do as a new trader or maybe an experienced trader is to calm those things down. You need to calm the greed down, to ease the fear down. And if you can do that, it will help you give a lot of benefits.
It's important that you're able to trade for the rest of your life. Do it consistently. The way to do it is to start by trading small.