The Pathways to Increased Trading Performance: Part 1

Looking at ways to take your trading to the next level of success.

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Finding the path to better trading success.

This is the first of a two-part series.

As you grow as a trader, you are forced to figure out the best path to increase your trading performance.    There are four common ways to do this and as you might imagine, each has their own set of pros and cons.  Much of this is common sense, but we’ll have a go at them anyway...here they are:

Path #1 -- Trade Bigger Size     

Pros:

It’s Easy I mean, it’s not easy to succeed at, but it’s easy to do.  

Especially early in your trading career as you move up from small share size trades, and especially if you are trading liquid stocks. It's just not that hard to go from 100 shares at a time to 200...and you've now doubled your profit potential.

Instant Gratification.  There is no faster way to increase profits than to ramp up share size.  If you are right, you are instantly rewarded with larger gains on your P/L blotter.

Upside potential.  For the most part, this pathway has room for growth. You can keep ramping up share size for a while if you are trading liquid stocks.  Eventually you may see some slippage (see next section), but your returns can quickly escalate if you can successfully trade larger position sizes.

Cons:

Increased Risk.   Pretty simple.  Bet more, and you may lose more.  You also set yourself up for your first "Punch in the Nose" trade.  When you ramp up your size, you will ultimately experience a trade that whacks you...bad.

 Due to your increased exposure you will lose more money than you ever have before, and you'll learn a lot about yourself and your ability to deal with those consequences.    If you think this won't happen to you, you are wrong.  It will....trust me on this.

Increased Buying Power requirements In order to trade bigger size, you need to have the money in your account to do so.

Takes traders out of their comfort zone.  Amplified moves in P/L often force you to take profits too early when you see unfamiliar (uncomfortable?) P/L readings.  This can make you panic out of losers too early when you see positions spinning red... and also exit winners too early when they you unfamiliar P/L jumps.  Stunted trades can also lead you to over trade which increases commission costs and can erode your confidence.

Slippage This may not happen right away, but eventually, the higher you climb the share size ladder, the harder it is to get in and out of trades without price slippage. This is especially true in smaller and thinly traded stocks.  Beyond the direct negative P/L consequences associated to price slippage, this can also lead to higher frustration levels.

Path #2:  Trade more Stocks Simultaneously

Pros:

Immediate results.   Much like trader bigger share size, when you trade more positions, you can see immediate positive results.   It’s not linear like trading bigger size, but it can really add to your P/L quickly...especially if your positions are properly correlated with current market direction.

Increased Likelihood of Finding a Big Winner.    Assuming you are on the right side of the market, having more positions on can increase the likelihood of finding the big winners, and avoid the frustrating feeling that you are  in "the one/two  stock(s) that won't move".

Cons:

Increased Risk.    Your P/L risk is now heightened as you have more exposure to the market.  If you are trading in one direction, you are now vulnerable to sharp market reversals.  If you decide to hedge your positions, then you have increased your commissions and added another layer of difficulty to your strategy.

Increased Buying Power requirements.  Just as it was trading bigger size, now that you are trading multiple positions, you need to have the money in your account to do so.

It's hard. You have to work harder to find more stocks that fit your criteria.  Once you've found them you now have to track multiple positions, which can be difficult if you are not used to it, and potentially take you out of your comfort zone.

Photo Credit: Getty Images/ Whit Preston/The Image Bank