As I mentioned previously, the root cause of failure in day trading is that new traders care too much about other people’s P&L. Due to human emotion, greed will end a new trader very quickly. Another big reason is simply their position sizing is wrong. Regardless of whether you take the wrong setup, don’t stop out in time, have a technical issue, press the wrong button, or maybe God himself comes down and throws you off your chair – whatever your excuse is, you could survive most of those scenarios if your sizing was appropriate for the stock.
The unfortunate side of this business is that you will see a lot of traders struggle and fail. It’s just how it is going to be. Based on the numbers, there are going to be more who fail than those who don’t. But if you’re one of those traders who’s struggling right now, you can try to boost your odds by at least understanding this basic idea.
Over the decade that I have traded, my sizing has not really scaled up too much. Without divulging it here, it’s relatively flat and I am very happy with it. You don’t necessarily have to size up to earn more; you just have to lose less.
Typically, my position sizing looks something like a bell curve. It begins small when I start trading, and if I find that I am connecting with the market that day, such as making winning trades, I will begin to increase size until I eventually reduce it again. This is a classic bell curve and will allow you to test the water, get your feet wet without too big of a financial hit if you’re wrong. When or if you begin to catch some stride, increasing sizing or being at the top of your bell curve will help you capitalize at the right time. In order to keep your gains, one will want to downsize to where they started on the day or perhaps even lower.
If you refuse to conduct this style of trading and instead go all-in with your biggest sizing on every trade idea that you see, irrespective of market conditions and your emotional state, you will ultimately either incur a significant loss on the day or completely give back any gains that you may have made. Occasionally, it can pay off, but in the long run, it will catch up to you.
For those struggling with losses due to incorrect sizing, I wanted to offer you an old video published by Lightspeed Trader that I have found helpful. The video, “Recovering From A Bad Day” is over 15 years old by now and has served me well when I was new. I have no affiliation with Lightspeed, and I don’t know the trader in the video, but I have a lot of respect for his message.