The most significant change that I undertook in my trading as I strived to be the consistently successful trader I am today is reducing my size. We all know that size matters. In trading it is small size that matters.

One of the most devastating financial periods in my life was in October, 2008. I was a relative newcomer to trading options, at that point I had been trading options for about 5 years.
I was trading very successfully for several years. My mentor taught me how to do credit spreads on the major indexes. As my confidence grew so too did my size. I want from trading 5 or 10 contracts to trading 100 contracts on a couple of the major indexes. I had been chugging along at 4% to 6% per month for a couple of years. Sure I had some minor losses but nothing like what was coming at me in a few short days.

When the dust settled from October, 2008 expiration I had lost over $100k in that one month. It was so painful I could barely move. Of course I had heard of experiences like that from other major corrections, but knew it could never happen to me. I got early warnings but did not heed them and my mentor kept telling me you should be fine the market will rebound. Famous last words!
It certainly took me a period of time to stand upright again and I did an extremely challenging analysis of my trading model. I look back at this terrible time now as a positive. It totally changed my method, risk, exposure and results.

The first major change was size. I would never put myself in a position where one trade can do the damage both financially and emotionally to me that this experience did. If I was going to trade 100 contracts again, it would not be on one instrument. I vowed to trade 2 or 3 contracts spread over 30 to 50 positions. No one trade would ever concern me. I was now going to be the insurance company and spread my risk (capital) over many different positions.

I also modified my strategy to more statistically probable trades, but reducing my size was also a big key. I routinely have about 80% winning trades for the strategies that I employ. That means I expect to have 18 to 20 losers out of 100 trades but my overall results are stable and predictable. I accept the losing trades as part of my business knowing full well that not one of them can hurt me.

 

If you would like to discuss my thoughts on trading size, probability based trading or any other trading question give me a call at 239-272-3424. I answer my own phone.