Have you ever said to yourself, “it’s only a small trade, it doesn’t matter”?
If you answered yes, give yourself a slap on the wrist because this statement is wrong!
Every trade you make matters.
When you risk a smaller amount than you usually do, it feels like you can justify it not having to fit your trading system. If it loses you don’t really care.
This relates to a cognitive bias that we all have, the contrast effect. But as traders, we need to battle against cognitive biases as much as possible.
The truth is, the most important trade in the world is always the one you are about to enter or already have open.
If you want to incrementally increase your account over time to something more substantial, you won’t get there unless each trade along the way is executed well. No matter how big or small.
If you aren’t patient enough to wait for the trades that fit your system, you’re going to be forced to be patient later down the line when you need to recover the losses you make as a result of those impatient trades.
What if you lose 5 trades of 2% each because you weren’t patient enough or the amount at risk didn’t seem important enough to you? That’s a 10% loss. That means you’ll now need to make an 11% return to get back to break even. It might not seem like much, but as the losses creep up your ability to trade rationally reduces. It’s likely you will start taking more panicked actions.
What if that loss grows to 20% or 50%? The return you’ll need to get back to break-even will grow even more. After a 20% loss, you’ll need to make 25%. After a 50% loss, you’ll need to double the account!
Obviously, these are extreme examples, but it helps to paint the picture. The issue with taking frivolous small trades is that your great trades will lose some of their impact, as they will partially be just bringing you back to break-even.
So rather than constantly taking two steps forward and one step back, treat every trade as if it’s the most important trade in the world. Successful trading is a marathon and every step counts.