The old saying is timing is everything and of course timing in trading is important but is it everything? Another old saying is you cannot pick tops and bottoms so how can these two statements co-exist? The answer to both of these is through sizing your positions properly. Let’s look at these two questions individually and see how my answer changes the question around.
Timing your trades is important but as a trader it is a small part of being successful. Think of it this way, you can be early and small sized or you can be late and big sized. I think this bears repeating, EARLY AND SMALL or LATE AND BIG. If you are early and big you will lose a lot of money waiting for your trade to work, and you had better have a lot of money or you will liquidate at the worst point in time. I have seen it many, many times.
If you are early but you are small you will be able to sustain through that “irrational” period and get big when the proof of your thesis starts to play out. The trader who decides to wait for that proof and then hits it big with size may miss the first couple of percentage points but will have so much size that they can make that up through proper leverage or higher beta names.
Clearly you can see how the proper size here makes all the difference in the world. Small keeps you in the trade when you are early, big gets back what you may have missed being a little late to the party.
Picking tops and bottoms is very difficult but we tend to do a good job of that here because we are entering at multiple levels with multiple share sizes. Just recently we bought X (US Steel) at $56.48 which was 15 cents off the lows and the stock is currently trading at $63.65, 15 cents to make $7 that is a pretty good tradeoff.
This strategy directly fits in with the above thesis as well, enter small early and get big late. In this case late is right at the most advantageous level with a close stop out. By using the right size you can enter at great levels.
I want to wrap up this blog with one more point and that is being a trader means supreme planning skills. You must have a detailed plan for your entries, your sizing and for your timing. Is this a one minute trade or a one year trade? Do you want to be small and early or big and late? The choice is yours but have it planned out. Do not ask why the markets are going against you, accept that they are irrational and that for the moment you are incorrect but be able to be there when you are correct.