Five Ways to Increase Possibilities for Profit

Mar 17, 2007: 11:20 AM CST

While there are various ways to increase your potential for profit in the market, I am submitting five categories to begin altering your trading behavior to increase potential profits.

  1. Hold your trades longer than usual
  2. Increase position size (concentrate capital) in fewer stocks
  3. Decrease position size but trade highly volatile stocks (those with high beta, like Google (GOOG)
  4. Decrease normal position size, but trade more opportunities in more stocks
  5. Increase your market knowledge and education, or get with a trading coach or mentor

Let’s take them individually and discuss strategies for each:

        Hold trades longer than usual

My bias is scalping and day-trading. The targets for the patterns I identify are anywhere from 15 cents to a dollar. I usually hold trades from 15 minutes to a few hours. If I played on larger time frames consistently and held my position using the same patterns, I would be holding for days or weeks and playing for five to ten dollars sometimes. Of course, my stops would be larger and my losses larger and outside my comfort zone, but if I worked on overcoming this, I would enjoy the benefits of taking dollars out of the market consistently, instead of cents.

Also, by studying the dynamics of trend behavior and longer-term pricing action, you can find key spots to position yourself and hold trades for weeks (or even months) for dynamically increased profit. You can’t change overnight, so start by increasing your holding times slowly and incrementally take on more risk and profit. Of course, longer time frames require reduced share size, especially when making the transition.

        Increase position size in fewer stocks/trades

If you are accustomed to trading a balanced portfolio, or swing trading more than five to ten stocks, or trend trading dozens of stocks, it might be helpful to study your results and see if certain patterns are making money consistently, while others are not. then consider eliminating underperforming strategies for entry/exit. Focusing your efforts on three to five (or less) stocks at a time will decrease your decisions and increase your ability to monitor these positions. For day-traders, it might be helpful to hold only two positions maximum at a time, or just hold one concentrated position but monitor it closely.

        Trade highly volatile stocks with reduced share size

Remember, part of money management involves studying the beta or volatility of stocks. You do not want to concentrate a large position for a large time in a highly volatile stock, because your P/L statements – and emotional stability – will also be highly volatile. Google (GOOG) has been known to move $20 or more in a day (not to mention the $50 or greater overnight gaps). Research in Motion (RIMM) has been known to move $5 to $10 in a day.

If you are a scalper/day trader who normally trades 1,000 shares for 20 cents ($200 profit), then a $2 move in a volatile stock will result in the same profit with 100 shares – both actions could occur withing an amazingly short period of time – 10 minutes to 20 minutes. Reducing position size yet playing for the same target can reduce commission too, but make sure you have a strong stomach and wider stops before playing highly volatile stocks

        Trade smaller positions in more stocks

This is an interesting rule and one that speaks of diversification and hedging. I once attempted a swing trading strategy that attempted to find the strongest stocks in the strongest sectors and then offset risk (hedge yourself) by going short the weakest stocks in the weakest sectors. The strategy did not work for my risk-tolerance preferences, but the idea of hedging positions and taking more positions with decreased capital per position is appealing for longer-term investors more than traders. Traders capitalize on short-term price inefficiencies and must actively manage trades, and holding more than five to ten positions at a time can be extremely challenging for active investors or traders.

This is where “Edge” plays a major role. The difference between “The House” and gamblers in a casino is the concept of edge. If we assume the House wins 55% of the time and the gambler wins 45%, and the win/loss amount is slightly even, then two divergent strategies emerge:

The Gambler – with odds against him – should take concentrated bets fewer times, because if he plays all night, he will lose all his money because the more cards he is dealt, the more money he loses.

The House, with odds in its favor, wants the gamblers to play as much as possible – they many hands dealt because at the end of the night, it will take in more money than it lost, and it plays out its edge over many opportunities to demonstrate the edge.

Finding more opportunities to demonstrate your edge should result in more profits to you – provided you have a demonstrated and tested edge.

        Expand your knowledge or seek help from trading professionals

The markets are dynamic and there is so much to learn from so many people (websites, blogsites, books, seminars, coaching, training, simulation). Each step you increase your knowledge alerts you to more possibilities in the market and decreases the randomness and uncertainty factor you perceive as you trade. If you feel like you are hitting a plateau, there are various coaches – both psychological and educational – to help you reach that new level of success. Expanding knowledge also means testing your strategy or gathering more data on yourself and your strategies. Through increased knowledge, fear and anxiety should decrease as confidence in yourself and your abilities increase.

Obviously, you cannot try all these strategies at once, and some are designed for active traders while others are designed for investors or longer-term traders. These can be guides for helping increase your risk and profits, but you must determine if any of these strategies can be helpful for you. Before changing your strategy dramatically, always be open to new possibilities of how to better pull profits out of the market with increased confidence.

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Comments
  • HI,
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  • For me, I sought answers through seminars, books, websites, and any academic information I could find. Everyone kept telling me "Just do it" (in terms of taking the trades and the risk). I tried to find the perfect answer for overcoming fears, but for me, the answer came from - surprise - just doing it and taking on the risk incrementally and the world didn't end. I got better and more experienced, and that provided the best help. Seeing things for myself made all the difference. The knowledge I gained built the base - the actions provided the solution.

    I really enjoy that post(Traits of Successful Traders) - I've read some of the other articles on the website and am quite impressed. I'm also looking forward to reading more from your blog and am right there with you, cheering you on!

    Corey

  • Thanks for the book recommendations. I've heard so many good things about The Disciplined Trader book that I will have to give it a go. The same goes for Steenbarger's two books. I must say that over the past six months or so, even though I haven't touched any books of this variety, I feel I have learned even more from looking within, and from the comments others have provided on my blog. Still, it is important to keep the door open and to always be learning, so I will give these books a try. We journey onwards, and hopefully upwards.

    Lastly, from NYSE Scalper's site I found this link quite insightful: http://trade4cash.blogspot.... .

    all the best

  • Caravaggio: Thank you for the comment and insights.

    You're right - this is a good illustration regarding enhancing the core and branching out. This is the case in most athletics too. In trading, you have to know your risk tolerance, preferences, biases, knowledge levels (how to grow) and so much more. It is an immensely personal and difficult journey at times.

    The "U" shaped experience you described fits me perfectly, and I'm sure it fits so many other traders. I came in during a rising bull market and thought I was a genius, then got overly aggressive, blew out all my gains and much more, and walked away for a while. I couldn't stay away, and so I kept learning and reading and studying. Every attempt I made to return never had the "arrogance" (false confidence) I had at the early stage. Eventually, you give it up or keep going. There were times where I walked away for good... only to return. It really was my persistence, more than my confidence, that kept me from permanently throwing it in. Besides, I love it - the game is fun.

    Mark Douglas's book The Disciplined Trader did the best job for me in explaining how fear mentalities set-up and keep you from profitability. To overcome this, it took more reading than one book and then what helped was actually taking trades and taking on risk and seeing for myself that what I feared (losses, being a loser, not being perfect) wasn't so bad. Brett Steenbarger's book Enhancing Trader Performance also is a great resource for structured learning that helps you achieve new levels in trading (and does a great job of describing "Trading Traumas").

    It took a long time to get back to confidence and I approached trading with a fear mentality for a long time (trading "not to lose" vs. "trading to win"), and I'm still not where I was when I was "ignorant but blissful" to the risk in the market and in trading. I don't know if I ever will be able to get that overcondifent again - nor should I. I've had too many nasty losses that keep me gounded as risk-averse, and that is working for me - slowly but steadily, with high-probability trades that create an edge over time. I still have plenty of losses, but they're not "nasty" or debilitating.

    Development is probably like any price swing chart we view. Higher highs are followed by consolidation or pullbacks and a base, only to swing higher, consolidate more, retrace a bit, swing higher, etc. Trading development is described as 2 steps forward, 1 back (or sometimes 1 forward, 2 back!).

    My best to you.

  • I like you last point best.

    "Expanding knowledge also means testing your strategy or gathering more data on yourself and your strategies." - Knowing yourself, or myself, comes top of the list for me. I believe in strengthening the core, branching out, returning to the core, and repeating, over and over.

    "Through increased knowledge, fear and anxiety should decrease as confidence in yourself and your abilities increase." - This makes sense, although my experience was U shaped. I approached trading with a false sense of security and heightened confidence. This was shot to pieces as my results fell apart and as increased knowledge produced an increased awareness of the possibility for failure, black swans etc. But now, I feel I my confidence is returning. I don't know whether this will be cyclical.

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