Think Small for Big Gains in 2011


How many times have you fantasized about catching a stock that rockets 100%, 200%, 300% in a year? Now, looking back on your investing career, how many times have you caught that move and sold exactly at the right time to realize the gain?

We pore over those books like “Monster Stocks” or “How to Make Money in Stocks”. You see the charts of stocks making huge moves and start thinking “just a few of those and I’m on my way to early retirement”. In reality, they are trying to capture 10 to 20 percent of a move.

For 2011, toss out those grandiose expectations and start thinking small, small gains are good. Small gains combined with proper risk and position sizing can lead to triple digit gains over a year.

For my method, I am looking to sell when I have 6% or greater on any given trade. Rinse and repeat. Most likely you are trading a different time-frame with different stocks. You need to figure out what is optimal for your style.

It’s not as glamorous as hitting the home-run, but it is a way to generate consistent and stable trading method that will pay out year over year.

A starting point for proper position sizing would be the risk calculator:
https://spreadsheets0.google.com/ccc?key=tPsi6_zBWMtmIhTfOd3_AIg&authkey=CN-p3dMI&hl=en&authkey=CN-p3dMI#gid=2

Happy Trading

4 Response to Think Small for Big Gains in 2011

January 3, 2011 at 7:39 PM

I like the example risk calculator but I have a question about one formula.

The formula for total investment is '=H12 * H8 * D16 * 100'. I guess I expected it to be something like number of shares * entry price.

Is this right? Or am I totally missing something?
Thanks for the post!
-Peter

January 4, 2011 at 11:03 AM

That formula looks incorrect to me Peter. Will take a look at it and fix.

thanks for the heads up.

B7
February 2, 2011 at 9:52 AM

There is another benefit of closing a trade when a profit target is hit. It reduces the variance of the results. Lower variance means less expected risk, smoother equity curve and possibly larger position size.

A great resource about expectancy and position sizing is Trade Your Way to Financial Freedom by Van Tharp.

February 13, 2011 at 8:04 AM

Thanks B7, will check it out.

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