Monday, September 6, 2010

Account size and out performance...

After many years of reading and researching the markets and its various participants and actual trading, I have come to the realization that traders with small accounts like my self do in deed have a tremendous edge in short term trading and to a lesser extent in longer term trading in equities!

Firstly, due to liquidity, the range of stocks available for trading to the smaller investors like myself are generally not available to larger investors. At least they are not able to take positions that are large enough relative to the size of their account for even a 100% move to have significant impact. On the other hand, traders like my self can easily get 200% long even the smallest of stocks with no worries in the world. So while most trading books warn against concentrating your account in a single stock, I beg to differ. If you are not getting into a stocks before significant news like earnings or are not dealing with a pharmaceutical stock in most instances small account traders can and should trade high probability set ups in smaller stocks with close to 100% margin!

This ties into my second point. Even where a fund manager has found a stock with sufficient liquidity that has a set up they really like. A real A+ set up, the kind that can make their year. They can not really size up in these stocks and get heavily long. Most times they have to limit their position size to some percentage of average daily volume like 5% and this size might only correspond to a 10% or lower proportion of the overall fund.

Take for instance a stock like JKS. I could have gotten 200% long JKS as it broke out of its base and set a market stop loss with out worrying about slippage and hold with ease moving my stop loss up below the price action until I got stopped out for a 100% move. This would have caused my account to triple. On the other hand, a fund manager or even private individual with a much larger account may have been limited to only a 10% position which would only have resulted in a 10% return to the over all portfolio even though we both took the same trade etc. Also chances are the larger investor could not have simply set a stop loss and forget it. He would have had to actively manage his exit if the stock had moved against him or even when he was exiting with a profit. Often times larger account traders have to exit when they can and not when they want to.

So small traders should really embrace these advantages when building their trading systems. One of my bread and butter trades so to speak depends heavily on this advantage. I often get into stocks and risk 1 point looking for a 3 - 4 point move. Large funds cannot do this. Because by the time they have acquired their position, the stock would have already moved 3 - 4 points against them giving me my windfall profits!

Hope this concept helps!

Good luck and good trading!

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