One of the biggest errors that new traders make is trading too big. If you trade too large of a position size you will inevitably give back any profits you earn with your first losing trade or string of losses.
When you are starting out as a new trader: “Trade small because that’s when you are as bad as you are ever going to be. Learn from your mistakes.” – Richard Dennis
A beginning trader should be trading their smallest at the beginning as they learn about their own weaknesses and their trading method. Confidence should only come after proven competence and experience in maintaining trading discipline to follow your system. Trading too big is usually a sign of arrogance.
Trade size is like a volume knob on your emotions and ego and you don’t want your inner voices to be so loud that you are unable to follow your trading plan. It is harder to exit a large trade and except a loss than it is to exit a small trade for a loss. If you don’t take your original stop loss then it just becomes harder to take as it moves more against you.
Position sizing is one of the most important factors that will determine your long term success as a trader. This is not just for new traders but for all traders. Part of any profitable trading system is proper size per trade to limit the size of any one loss.
Before you ever trade you should have a quantified strategy with an edge. Once you have your system that has a positive expectancy then you should start small and work yourself up into more trade size in capital or a larger percentage of your current trading capital. You have to consider your average loss per trade, volatility, and worst case scenarios as you increase position size based on your own system parameters.
You should be first be trading your strategy consistently with success before you even think about starting to increase your position sizing. Trade better before you trade bigger. Master smaller trading before going into bigger trading. If you start out big your trading education will be much more expensive than it would have been with a smaller account, simulated trading, or through backtesting.
The biggest cause of unprofitable trading is big losses, position sizing and stop losses are the tools that eliminate these outsized losses. Your wins can be as big as possible by using a trailing stop or profit target but all your losses should be small.