Thursday, March 16, 2006

Account Size and Flexibility

I've noticed that as my trading account has grown, it has become easier to make good trades. A large account size allows me to place a smaller amount of capital in each trade and it allows me to increase my divirsification. These factors decrease my risk. Smaller proportional risk in turn, enahnces the decision making process. I find that I make decisions faster and miss less oportunities. I worry less about my positions which helps me to let my winners run, and gives me the patience to let trades work that have gone against me a little bit. Ideally one would risk less than 2% of capital per trade. With a small account this is very hard to do, because of minimum transaction sizes and transaction costs. I'm finally starting to get to the point where I can do most trades that I want to without having to risk too much of my Capital, although I still risk more capital than is ideal in most cases. I'm also still not there, in terms of how much capital I need to really be able to trade every instrument and opportunity that I want to. Just this week I've passed on 2 trades that would have been very good trades to have made in hindsight. I had to pass on these trades because the amount of capital I would have had to risk to do the trades properly was above my comfort level. But over all I like how things are going. I would like for there to be less volatility in my long-term portfolio, however. To that end, I have been accumulating less volatile stocks with a focus on good dividend earners. My goal is to eventually be at the point where stocks like SHLD and GOOG are not such large proportions of my long-term portfolio. I love these stocks, but having them as my biggest positions makes my portfolio more volatile than I'd like. Their proportion in my Portfolio has shrunk but I still have a lot of stock to buy (in other companies) before these become less than 5% of my portfolio since I am not going to sell any of the SHLD or GOOG I hold any time soon.

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