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Investing Information |
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The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs
Online trading is so seductive - just sit, click, and rake in the profits! But as anyone who has ever seriously attempted online trading will probably tell you, it's just not as easy as it sounds. Many beginning traders are seduced by the lure of the "home run", that big trade that makes you an instant millionaire and retires you overnight to your own private island paradise. But then they wake up. To really succeed at trading of any type, you need consistency, even if it's with small amounts. The ultimate goal is to keep trading over and over to eventual riches, but by always going for the big wins they usually wind up with big losses instead. It's perfectly understandable for people to not be interested in small profits. After all, which would you rather have, big profits or small? But the fact is it's not such a simple choice. Small profits are more frequently achieved but when traders refuse to take them, they often lose much, much more. Small but steady gains over time can add up to some truly massive numbers. For example, in options trading (my main area of focus for the last few years) it is not at all uncommon to hear about profits of 100%, 300%, even 1000% in a single trade! And while these results are absolutely possible, by expecting them to be our every day results we train our mind to accept nothing less, and eventually doom ourselves to disappointment. Imagine training yourself to take 10% profits. And what if you also train yourself never to put too much of your money into one trade, but instead to manage it carefully? Say you put only 10% or less of your total trading account into any one trade? If you could make just a 5% profit on only half of your total account every month, compounding the profits monthly, you would have a better than 31% return in 1 year's time and over 115% in just 3 years! How many investments are you currently involved in that have returns like that?! The key is small numbers, not large ones. In trading, there are typically only 4 possible outcomes: 1. A large gain Assume that over time, your small gains and small losses will average each other out. That leaves you with only large gains and large losses. If you absolutely, positively never allow yourself to take a large loss, that leaves only the large gain. These large gains will ensure that you make a lot of money over the long run. You aren't specifically aiming for them, but we know statistically that as long as you can survive in the trading game long enough, you are bound to get some lucky "home runs" every now and then. You can't win if you're not in the game, and the way to stay in the game is through proper money management, risk assessment, position sizing, etc. Without these components most new traders blow their accounts out and never return to the game. Don't be one of those traders. There are fortunes to be made in online trading, but you must be able to stay in the game. It is said that "the best offense is a good defense" and nowhere is this more true than in trading. Controlling risk and managing your money will all but ensure your success. The last major obstacle is your own emotions, but that's a subject for my next article, "Emotions: A Trader's Worst Enemy". Jonathan van Clute is a full time investor, educator, speaker, and online options and sports arbitrage trader. In addition to his business activities, he is also a musician, video editor/animator, and one of the world's greatest Segway Polo athletes. He can be reached via email at jonathan@PMLinvestments.com and is speaking at an upcoming teleseminar, visit http://www.snurl.com/PowerNumbers for details.
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