I've been trading for over 25 years. During that time I've made many changes and improvements to my approach to the market. However, the one enhancement that I constantly struggle with is using my capital more efficiently and trading in bigger size.
If what you are doing is working then it makes sense that in order to improve your results you should do more of it. If you have the available capital you can trade three times bigger and produce three times the returns.
It is pretty simple logic but like most things in the stock market, it isn't nearly as simple as it sounds. Becoming more aggressive and trading bigger is the hardest thing to do in trading.
Traders who are successful over a long period generally are not gunslingers. They don't make huge bets on binary events and they don't take huge risks with their precious capital. They grind it out daily and play strong defense when market conditions demand it.
While those are good and effective habits, they also tend to limit potential.
Trading the same size lots as you did when you first started trading is safe and comfortable. Why mess with something that is working? The problem is that you can't grow that way and as your capital base increases your returns are likely to suffer. There is little stress when you have limited capital at risk but that also results in mediocre returns.
A Different Game
Many traders fail badly when they try to move into money management because it is a very different game. You can't trade a smaller account the same way you trade a multi-million dollar account. There are a slew of tradeoffs that much be made and they require a change not only in style but in mindset.
The biggest problem that traders face when they "go big" is that it evokes emotion. Rather than dispassionately evaluate whether a trade is working right, there is a tendency to question your judgment. When you question your judgment rather than the trade itself you are using emotion and that quite often leads to a suboptimal decision.
Many traders fail badly when they try to move into money management because it is a very different game.
The most common experience for traders trying to ramp up their aggressiveness is they are burned for a very big loss very quickly. The whole idea of becoming more aggressive goes out of the window due to the pain that one bad trade has produced. It is going to happen. When you trade bigger you have the potential for bigger gains, but also the potential for much bigger losses and they will hurt.
This goes back to something I recently discussed which is developing a tolerance for volatility. If you can't handle bigger swings in your account mentally or emotionally then you are not going to be able to trade bigger. There simply is no way to produce meaningfully larger returns without some increase in the level of risk.
The methodology for producing exceptional returns is not a big mystery. You do it by holding a concentrated portfolio of the best stocks. The problem is that it produces increased volatility and much higher risk. If you set stops too tight you will be taken out of many of the best stocks that tend to have large swings. If you don't have fairly tight stops then you will suffer some gut-wrenching losses when you pick a dud.
One way I try to deal with this is something I've discussed many times -- diversifying by time frame. I take a large position in a stock that I favor but then I trade it in a variety of time frames. I day trade part of the position, but also will hold core positions for months.
This allows me to become very familiar with a stock over time and it also allows me to expand and contract my position based on technical and market conditions. When you find a stock that is a winner the best thing you can do is trade it aggressively and in size but you have to find ways to control not only the risk but the emotions that will occur.
The hardest thing in trading is to build on your success and to take it to the next level. It is something that will challenge you as long as you are an active trader and investor.