This latest excerpt from The PlayBook comes from Chapter 9: “Iceman: No Guts, No Glory”:
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So let’s say that now you can risk 30 percent of your intraday stop loss and hold for the real move. Next you want to get even bigger. At this point, most incorrectly focus on adding share size. So if 5,000 was your biggest position, you start to think about trading 8,000 shares. This is a mistake. A better idea is to increase the size of your trading account, increase your intraday loss limit, and continue risking 30 percent of your intraday loss limit. In short, think of your biggest positions in percentage terms and not share size or P&L.
Let me make my point clearer with a story and a blog. SMB hosted a guest lecturer of international trading acclaim. During our Q&A, one SMB trader introduced that he had been consecutively positive every month for over a year but needed to trade bigger. The hedge fund principle instantly offered advice using a trader he had helped. He said, “I had this one trader I was working with who had a similar issue of putting on more risk, though he trades much bigger than you: a book of 250 million. What did we do? We gave him more money. So keep doing what you are doing. Just trade with more money.” Over time, slowly but consistently increase your trading capital and thus your intraday stop loss and how much you are willing to lose on your A+ trades. With this increased capital, keep thinking of your trades in percentage terms. If you think of trading in percentages, you become scalable. The firm can easily allocate more capital toward the trader because you offer them a clear understanding of their risk and demonstrable evidence that you can handle more capital. If you do not have a methodology to determine your best trades and how you will place risk, then you are not scalable. And if you do not do this, from my seat, you have not done the work to deserve a bigger bank roll.
This visit from that top trading coach and his sizing idea was captured as part of a blog post reprinted here.
Ten Takeaways From A Top Trading Coach on How To Be A Successful Trader
Jan 10th, 2013 | By Bella |
SMB had an elite trading coach (name cannot be shared for compliance reasons) visit yesterday for an informal presentation with tips on how to improve trader performance. This coach has worked with the top traders in the world, at prop firms, investment banks, and hedge funds. SMB Trader, King of Men, put together a list of ten takeaways from this talk. We thought you might consider them for your trading.
1. Successful traders have meaningful attachments or some other source of motivation and
happiness outside of the financial markets.
2.Successful traders are proactive; they know what they need to learn, and they know what
they need to do to execute. Being active alone is not sufficient.
3. Successful traders tend to be process driven; they develop and refine routines that turn
good trading behaviors into habits and execute these routines habitually.
4. Successful traders have a unique signature; they have an edge that they execute consistently and improve constantly.
5. Successful traders treat every trade as a learning opportunity, especially losing trades.
6. Successful traders identify their A+ setups, best products, and optimal time frames that
are most intuitive for them and work to maximize their production in those ideas.
7. Successful traders avoid thinking in dollar terms; they standardize in terms of percentages to measure performance as well as put on risk.
8. Successful traders have a sniper mentality; they are prepared to wait for as long as it takes
and ready to pull the trigger when a valuable targets appear in their scope.
9. Successful traders have a comprehensive set of measurable and challenging yet realistic
goals; they regularly evaluate their progress and always ask what they need to do to make
further progress toward their goals.
10. Successful traders use all their resources to improve, particularly other traders.
Let’s spend even more time clarifying this technique and why it works. Again, most think of trading size as the number of shares you are willing to trade. Do not use this as a measurement. Think of how much you are willing to lose in percentage terms of your bankroll. There may be limits to how much you are willing to lose given the size of your trading account. This might not go away even if you are ready to trade bigger. A rip in that bigger trade with your present-size trading account may bring trauma to your trading brain. The loss may be too much money to you given your account size. That is why you need to increase your bankroll. Get more capital to trade. Then your loss will just be a percentage of this higher bankroll, and you will still have plenty of money left with which to trade.
In summary, increase your trading capital for your trading account. And then keep taking the same percentage risk for your trades. (This assumes your ideas are scalable.) Keep doing what you are doing. Think in percentages of your account as a swing trader and intraday trader. (And, seriously, if you need some more capital, you are consistently profitable, and you need someone to take your added downside risk, give SMB, or a firm like ours, a ring. This is what a true prop firm does.)
It will be an individual and long journey to add size. Do not force this process. You cannot go from being able to lose $300 to $1,000 overnight in your A+ trades. Add incrementally. An extra 20 percent for each 10 days of positive trading data is an effective technique.
You can be better tomorrow than you are today!
Mike Bellafiore
no relevant positions