Contents
Today’s article is for the new traders.
For the old hands, they can do whatever they want.
As the saying goes:
“There are bold traders. And there are old traders. But there are no old bold traders.”
This is to say that if you are too bold, you will not become an old trader.
For the new traders, you want to become an old trader.
To do this, you need to start by trading small.
Trading involves risks.
New traders sometimes underestimate the risks because they do not see what the markets can do.
Trading small helps limit potential losses and protects the trader’s capital.
Indeed, one can not make money when one is trading small.
New traders should be focused on learning first and then making money later.
They should be learning how to not lose money.
The statistics are that the majority of new traders will lose money.
New traders are still learning and familiarizing themselves with trading strategies, market behavior, and the impact of various factors on their trades.
Trading small allows them to gain valuable experience and knowledge without risking large amounts of money.
They can scale up once new traders can make a small, consistent profit.
New traders also underestimate how emotions can affect the trades.
Large trades can induce strong emotions such as fear and greed, leading to irrational decisions and poor trading outcomes.
Trading small helps new traders to manage their emotions better and develop a disciplined approach to trading.
It is less emotional to lose $50 than to lose $500.
New traders sometimes like to ask if they can always get a strategy that they can win.
Or how they can fix a losing trade to get out without a loss.
Old traders know that such a strategy does not exist and that some trades can not be fixed.
Trading requires taking losses.
Trade small enough so that you can take those losses without it affecting you emotionally.
Trading small smooths out the equity curve.
The 2% rule is that no one trade should cause the account to lose more than 2% of its value.
Trading large will cause the account balance to swing up and down a lot.
If one trade can lose 10% of the account balance, that is too much.
Taking five losses in a row (which certainly can happen) would cut the account by half.
The emotional toll on the new trader would likely cause revenge, fear, FOMO, and other psychologically influenced trades.
Getting back to breakeven would require doubling an account (which is already difficult even for experienced traders).
The account is too close to being in danger of complete loss.
No one wants this to happen!
Preserving capital is crucial for new traders.
By trading small, they can avoid significant losses that could deplete their trading accounts quickly.
This allows them to stay in the game longer and build their skills over time.
Mistakes are inevitable for new traders.
Trading small means that when mistakes occur, the financial impact is minimal.
This makes it easier to recover from errors and continue learning.
To stay in the game requires persistence – and a lot of it.
The market will test all of us.
Another aspect crucial to trading success is confidence – but not over-confidence.
Success in trading often comes from building confidence through small, consistent wins. Trading small helps new traders to build confidence gradually as they see positive results from their trades, reinforcing good habits and strategies.
What Do Others Think
Charles Cottle is a former floor trader, options educator, and book writer.
Nicknamed “The Risk Doctor,” this is what he had to say when interview host Tom Nunamaker asked him what advice he would give to new options traders…
“Trade way f***ing too small. Trade really, really, really, really small. Why? Because you’re gonna take some beatings, and you need staying power. And you don’t know enough about the landscape and all the different ways you can screw yourself even when you’re doing everything right.”
If you want to hear his colorful language, scroll to 46 minutes into the YouTube video.
The following week after that YouTube broadcast, Tom interviews another seasoned trader, Mike Schwartz, on Trader’s Tuesday,
And guess what?
About 10 minutes into the video, Schwartz says essentially the same thing:
“The people who struggle the most are the people who are trading too big. So, a mistake is much more costly than if you are trading small, like 1% or 2%. It’s not going to be the end of the world if you make a mistake and you let a trade go beyond where it should. … Number 1. Trade as small as you can. Number 2. Stick with something.”
Traders trading too big will likely abandon a perfect strategy whenever it hits a drawdown.
They would exclaim, “What? Down $1000. This strategy is no good – causing me to lose too much money.”
When in reality, it may be perfectly normal from time to time for the strategy to lose this amount in percentage terms.
Then, they switch to another strategy.
And, of course, the same thing happens again.
So, they end up unable to find a strategy they can stick to.
Final Thoughts
Maybe you think you are trading small already; trade smaller.
Please don’t underestimate the market, as the market can sometimes surprise us.
Trading small (or even paper trade) provides new traders a safer environment to learn, practice, and refine their trading skills, helping them become more proficient and confident without the risk of substantial financial loss.
We hope you enjoyed this article on why traders should trade small.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
