Lesson into Controlling Stake Sizes
Guest contribution by Alex Docharty who gives his insight into the psychological barriers involved with spread betting -:
This is one of the biggest hurdles I had to overcome in learning to trade profitably, and was probably the hardest thing to learn.
Why is it so important and why was it so hard to learn?
My main problem was that I didn’t believe it was all that important. I’d read everywhere that you had to keep your exposure low, but hey I was in this game to make profits. If I kept my risk size low it meant I would never make any serious money, right? If I was trading at only say £1/point and won 100 points then I would have won £100. Great – but what’s the point when I could have been trading at £../even £50 a point and could have won £1000/£2000/£5000 on the trade?
When I examine this in retrospect, my problem seems so obvious. I was trying to run before I could walk. My mindset was completely wrong. I was going into the bet with the assumption that it would win. Rather than accepting that I was still learning and that this was exactly the time when I should be keeping my risk small until I could 100% prove to myself that I had a winning strategy, I was impatient to make millions. The problem here was that – at the time when I was most vulnerable to loss – in attempting to maximise my win size I was in fact maximising my loss size. This meant that my working capital was devastatingly weakened just as I was starting – meaning that when I really was ready to increase my trade size, I wasn’t able to increase it as much as I would have liked due to lack of capital.
Impatience is one of the toughest things to conquer when you’re learning to trade. Yes, you know that the market will still be there tomorrow and that there will always be an opportunity to trade, but you somehow feel that a) you’re missing out on a win if you’re not in the market and b) you’re missing out on potential profits if your trade size is small. It’s exactly these two things that you need to learn to control as by falling foul of (a) you’ll end up overtrading rather than waiting for the best trades, and by falling foul of (b) you’ll be losing critical capital while you’re still learning. If you combine (a) and (b) you can see how easy it can be for a beginner to blow their account before they’ve realised it.
There are all sorts of other problems with trading with too large a stake. One of the biggest is the fact that when you’re trading with ‘scared money’ it’s easier to make emotional decisions. Rather than leaving your trade to play itself out until it hits its stop or target, you’ll be more prone to stop it out early only to find it go back into profit, or to take profits only to find that if you’d held out it would have hit your target.
So how did I overcome this problem?
It was only after a series of devastating losses that I realised that I had to start all over again. I vowed that I would take things slowly and, more importantly, would never again assume that a trade was going to be a winner. I started out again with £1/point and worked on overcoming my impatience. Yes, it was difficult – I had to overcome the urge to try to win back what I’d lost – but it was a worthwhile learning experience and, more importantly, I stopped losing money. When I proved to myself that I could trade profitably at £1 a point for a couple of months, I then injected more capital into my account and increased my trade size to £2 per point.
And so on. Most importantly, it was only when I was comfortable with my trading that I allowed myself to increase my stake size. And by slowly increasing my stake size I never felt that stressed out-of-control feeling that I would get when I was starting. I was happy with every trade as I had already accepted in my mind the fact that it might be a losing trade and had limited my risk accordingly.
This is one of the toughest lessons to learn but really is the most important one if you want to be successful in your trading. I know you’ll probably ignore it – I know that I did. But all I’d ask is that next time you suffer a huge loss you come back and read this again and reconsider your strategy. Seriously, this is the only way to go.
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