How to Trade Small to Produce Big
One of the biggest mistakes that many of you will make as newer traders is to “swing for the fences” every time you place a trade. For those of you outside of the United States or other baseball playing countries, you may not understand what that expression means, but it is essentially trying to score big in one shot. Trying to crush the ball over the fence instead of playing the fundamental part of the game and winning over the longer-term.
Those of you with small trading accounts are at a disadvantage in some ways, as I have spoken about before. However, you can clearly profit quite well using well-placed small trades and doing a bit of strategic planning ahead of time.
You don’t have to place everything into the trade in one shot
One of the biggest mistakes that traders make is that they throw all their money into position in one shot. While that can work, it can also hurt you very drastically. As I began to trade professionally, and started to trade other people’s money, I was taught to scale into a position. This is because you can minimize your losses, as a small position put on initially getting knocked out isn’t much of a concern. For example, it might only be 0.10% of a loss. This allows you to keep your money safe.
However, once a trade starts to work out in your favor, you can simply add as you go along. Beyond that, it gives you the ability to build up a large position as your account has more margin available to it as you gain. Market participants will gradually move the market in one direction or the other and you want to be there for the move. With a small position, you can have much larger swings against you and therefore follow the large and longer-term trend. Once we break through support or resistance and continue the trend, then you just simply add. This is how larger funds trade, because they are moving huge amounts of money. They do not throw all their massive cash into a single position in one shot, because if you get knocked out you can take too large of a loss.
Scaling means you are looking at the longer-term picture. When you scale into a position, it’s not rare that you may be holding onto it for months. This not only takes a lot of the volatility out of the markets for you, but it also helps with the psychological game as you are simply collecting more and more money as time goes on. You can put stop losses on your position separately, meaning that you don’t necessarily have to have the entire thing taken out of the market if you do get a sudden retracement. This is how large traders get involved, because they typically have some type of fundamental thesis that they are following. Think of it this way: if you have nine different positions going in the same direction, and one of them starts to lose a little bit, while the other eight are positive it’s not much in the way of psychologically damaging.
Higher leveraged accounts
If you have a small account that you’re not worried about losing, then you can start talking about massive amounts of leverage. However, I don’t suggest this as it is simply throwing money away. If you are patient enough, you could write out the longer-term trend, and take advantage of one of the biggest bonuses of trading Forex: the fact that currencies will quite often trend for 3 to 5 years. Because of this, you can build up huge positions to make massive amounts of money along the way, but unfortunately the average retail trader isn’t patient enough to build up a position, as it isn’t very exciting. It is because of this that they are attracted to the massive leverage that some brokers offer, but that massive leverage can also work against you, typically meaning that you’re going to blow the account out.
Forex markets trend more than others
One of the biggest reasons to trade Forex is that it does tend to go on for some time once it makes up its mind. This is because you’re talking about trading national currencies, and the national economy tends to be slower to change than a particular company. Because of this, if you had shorted the British pound during the Brexit boat, you have had plenty of opportunity to make money on the way down.
The same thing can be said for many other times in the past such as the financial crisis of 2008. If you had shorted the USD/JPY pair back then, you could have made an absolute killing. However, there were times where the market bounced back, and therefore if you were in with a full position, you could have been shaken out. However, if you gradually build up a position, you could have made quite a huge return. The reason this is important is because had the market turned right back around against you, all would have been okay because the losses would have been very minimal to say the least.
You should take advantage of the way Forex tends to trade and stay in a position as long as possible. Ultimately, the ability to hang onto a trade for much longer also brings on your trading costs, as you will only be paying the spread occasionally, as opposed to several times a day. In the end, it’s about profiting, not entertaining yourself.