Over the years many traders fall into a comfortable niche. They knock out some good trades, give back some gains and produce pretty good results over time.
They tinker with their stock selection, stop losses and trading methodology to try to produce better returns -- but they don't ever make the big leap forward that produces elite results.
The obvious difficulty that traders face is that to take trading from "pretty good" to "exceptional" requires more than tinkering. It not only requires substantial effort but the ability to deal with emotions associated with taking on a higher level of risk.
There is absolutely no way to avoid increased risk if you want to produce better returns. There are ways to deal with increased risk but it can never be completely eliminated. Once you embrace that fact you can start to move to the next level.
The best way to advance your trading to a higher level is contained in a comment from George Soros. This advice stuck with one of his prize students, Stanley Druckenmiller, who many consider to be the best trader in the world today. The advice is:
"It is not whether you're right or wrong that's important, but how much money you make when you're right, and how much you lose when you're wrong."
In the course of regular trading, it is very easy to overlook the importance of this issue. There will be the inevitable winners or losers but it is the magnitude of those profits and losses that determines our level of success. Finding good stocks isn't that hard but making big profits when we find them is the challenge.
How often have you had a great trade but held such a small position that it barely mattered? How often have you had a losing trade that you have made much worse by doing the wrong thing at the wrong time? Those are the issues that must be addressed to take your trading to a higher level.
Over my years of trading, the one issue I have struggled with the most is increasing the size of my positions. As soon as a position moves over a certain threshold it stirs up increased emotions and impacts the way I view the trade. There is a much stronger inclination to sell it on minor weakness to escape the increased stress and there is always the temptation to lock in a gain when there is a small profit so I can claim victory. Emotions drive the trade much more than a logical methodology when there is a substantial amount of money on the line.
The best results will always be a product of large concentrated positions in a small number of stocks. That is the recipe for exceptional gains. It is also the recipe for huge losses if we pick the wrong stocks. Since our primary goal should always be to protect capital we should err on the side of reducing risk.
It is a conundrum that is not easily solved but if we don't address it, then we will never advance.
My approach to this issue is the same one I've discussed many times. Use an incremental approach with a variety of time frames.
Concentrate on the stocks that you believe provide the best opportunity but trade them in a variety of time frames with a variety of approaches. Don't just buy a single big position and then sit and wait for it to work. That isn't trading, that is gambling. The key is to use random movement to your benefit. As long as the overall thesis for a trade remains intact there shouldn't be any great fear of the inevitable volatile.
Consider the Soros quote above. Soros isn't advising that we just take big, concentrated positions. He is advising that we look for ways to maximize gains when a trade is moving in our favor and look for ways to cut losses fast when a trade isn't working. This is the hard work of trading.
We have to constantly manage positions as a trade develops and not just sit there with our fingers crossed and hope that we are right. I should be making dozens of a trade in a good stock if I really want to maximize my profits as it develops.
There is no way to completely eliminate risk when we trade aggressively but we can increase our exposure to risk and reduce it as conditions demand. If you know there is a binary news event about to occur we must measure the risk involved in holding versus reestablishing the trade after the event is over. When a stock is drifting lower in a dull market that may be the time to take on more risk but to make sure stops are still in place.
I hold a number of stocks right now that I believe have the potential to eventually be big winners. My job is to manage those positions so that if I'm right I will see exceptional gains. It is how much money you make when you right that will push you into elite status and it is how much money you lose when wrong that can destroy you.
Big, concentrated positions are the key to huge returns but they are much more a product of effective trading than astute stock-picking.