Why You Should Never Open a Trade With a Full Position.

Imagine you buy at the bottom.

Your timing was perfect, and the trade never moves against you. The only problem with the trade is your regret that you don’t have more shares. If only you used more margin, you tell yourself.

“Next time” you say. I won’t be stuck with a small position again.” Go big or go home.

The danger lies quietly waiting to poke a very large hole in your account. She is sneaky. You never see her trap. She gave you a taste in order to stimulate your greed. It works every time.

The problem starts when you believe buying at the bottom with consistency is a reality. It’s not. It’s extremely rare and more importantly it’s not necessary to produce an impressive return on capital.

However, that doesn’t stop us from imagining it. In addition, this is where the problem takes root. We believe in the unicorn.

Problem number two is visualizing the position that never moves against us. We envision never needing to manage the risk in a trade because we believe perfect timing is possible. If we only study the charts harder, we tell ourselves.

We believe the elite traders have the perfect and secret combination of moving averages or candlestick patterns. They have the Fibonacci combination we haven’t discovered.

The Million-Dollar Fallacy

Most of us entered trading because we believe that with hard work we can conquer the markets. We have faith that we can eventually understand how to make consistent money.

The truth of the matter is you can learn how to make money in a few months of watching price action and placing real trades. (I am not a big fan of paper trading)

The mistake we make is to believe we need to be right on each trade. We believe the results of each trade will indicate to us if we are getting better. If a trade doesn’t make money we go back to the drawing board, we scour our notes and try to determine what we did “wrong” on that trade.

This is fool’s gold. Trying to find a nugget every time we sift the pan. It’s encouraging when we find one. The short-term success fuels our desire for the long-term result.

The truth is imagining you buy at the bottom, picturing a trade that never moves against you and judging results on a trade-by-trade basis is not how elite traders became successful.

These three events are implying you expect to know the future and are willing to bet on it. The truth is you never want to expect an outcome and you certainly do not want to risk larger capital allocations until the position has proved itself.

Great traders forecast probabilities and never expect an outcome. The only thing they are 100% confident in is whether they have an edge and they scale into positions when price action tells them it is safe.

If the trade happens to fail, they accept the risk and execute the stop loss on a smaller position. If the trade begins to move in the intended direction, only then do they add to the position.

Great traders add to winning positions and hold as long as the entry reason is still valid. This strategy of “working a position” until price action validates your thesis is practical, probabilistic and profitable.

Eliminate the ego driven need to be correct. Eliminate the need to validate your analysis with a large position and you immediately become a better trader.

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