The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs

Online trading is so seductive - just sit, click, and rake in the profits! But as anyone who has ever seriously attempted online trading will probably tell you, it's just not as easy as it sounds.

Many beginning traders are seduced by the lure of the "home run", that big trade that makes you an instant millionaire and retires you overnight to your own private island paradise.

But then they wake up.

To really succeed at trading of any type, you need consistency, even if it's with small amounts. The ultimate goal is to keep trading over and over to eventual riches, but by always going for the big wins they usually wind up with big losses instead.

It's perfectly understandable for people to not be interested in small profits. After all, which would you rather have, big profits or small? But the fact is it's not such a simple choice. Small profits are more frequently achieved but when traders refuse to take them, they often lose much, much more.

Small but steady gains over time can add up to some truly massive numbers. For example, in options trading (my main area of focus for the last few years) it is not at all uncommon to hear about profits of 100%, 300%, even 1000% in a single trade! And while these results are absolutely possible, by expecting them to be our every day results we train our mind to accept nothing less, and eventually doom ourselves to disappointment.

Imagine training yourself to take 10% profits. And what if you also train yourself never to put too much of your money into one trade, but instead to manage it carefully? Say you put only 10% or less of your total trading account into any one trade? If you could make just a 5% profit on only half of your total account every month, compounding the profits monthly, you would have a better than 31% return in 1 year's time and over 115% in just 3 years! How many investments are you currently involved in that have returns like that?!

The key is small numbers, not large ones.

In trading, there are typically only 4 possible outcomes:

1. A large gain
2. A small gain
3. A large loss
4. A small loss

Assume that over time, your small gains and small losses will average each other out. That leaves you with only large gains and large losses. If you absolutely, positively never allow yourself to take a large loss, that leaves only the large gain. These large gains will ensure that you make a lot of money over the long run. You aren't specifically aiming for them, but we know statistically that as long as you can survive in the trading game long enough, you are bound to get some lucky "home runs" every now and then.

You can't win if you're not in the game, and the way to stay in the game is through proper money management, risk assessment, position sizing, etc. Without these components most new traders blow their accounts out and never return to the game.

Don't be one of those traders.

There are fortunes to be made in online trading, but you must be able to stay in the game. It is said that "the best offense is a good defense" and nowhere is this more true than in trading. Controlling risk and managing your money will all but ensure your success. The last major obstacle is your own emotions, but that's a subject for my next article, "Emotions: A Trader's Worst Enemy".

Jonathan van Clute is a full time investor, educator, speaker, and online options and sports arbitrage trader. In addition to his business activities, he is also a musician, video editor/animator, and one of the world's greatest Segway Polo athletes. He can be reached via email at jonathan@PMLinvestments.com and is speaking at an upcoming teleseminar, visit http://www.snurl.com/PowerNumbers for details.

---

Dont Catch a Falling Knife

One of the most common mistakes made by inexperienced investors... Read More

Super Rules, OK?

Do you rule your superannuation or does it rule you?It's... Read More

Get Wealthy With the Rule of 72

When it comes time to retire how many people would... Read More

High Volatility Investments

Penny stocks and options are high volatility investments that attract... Read More

Penny Stock Investing

The Nature of Penny StocksFor anyone new to investing in... Read More

Types of Investment

The word 'investments' is one that most of us are... Read More

Diversify!

The best way to avoid being hit hard by a... Read More

Seecrets on Investment: Tired of Making Huge Losses in the Stock Market ? Part 1

Over 80% of all individual investors lose money in any... Read More

Scots Beat Yanks in China Bank Deal

With visions of an ATM in every neighborhood in China,... Read More

Finding the Perfect Company

The perfect company - it's the holy grail of the... Read More

Annuity Investment Guide

While there is not a lack of information on annuities,... Read More

June 2005: Weather Forecasts for Weather Traders

If Johannes Kepler, the renowned 17th century astronomer and discoverer... Read More

Can Your Annuity Do This?

Many people buy annuities according to their agent's recommendations. However,... Read More

Critical Investors Business Daily Responsibilities - If not Followed Could Cost You Millions!

When thinking about the investors business daily responsibilities in today’s... Read More

An Investment Real Estate Strategy Unknown To Most Is A Negative Amortization Loan

If you want to make the most of your personal... Read More

In a Time of Need

As I take my leisurely walk with my dog through... Read More

Online Trading Options Strategies - Rolling

Rolling is defined in options online trading as moving a... Read More

Chile Leads the Latin Pack

Everyone's talking about China. Don't miss the opportunities in the... Read More

Why Should I Use Penny Shares to Build Wealth?

A strategic question. Why indeed?1. A penny share would usually... Read More

Invest To Make Money, Not To Get Rich

The technology boom of the '90s romanticized the "rags-to-riches" ideal... Read More

Investing: Do You Want To Make Money, Or Would You Rather Fool Around?

It always amazes me how much stock market investors resemble... Read More

Top Ten Investment Mistakes

1. Lacking an investment plan a/k/a/ "Don't take a trip... Read More

Retirement or Financial Freedom?

In the past most people never retired. They died. The... Read More

When It Comes To Investing, Asking The Right Questions Can Help You Make The Right Decisions

Are you ready to open your pathway to financial independence?Well... Read More

Stock Market Money Management Skills

Let's start by saying: You can't be afraid to take... Read More

Justify Social Security ... Dont Save for Retirement

It is a common question when investors review their retirement... Read More

Profitability And Stock Turn Rate

The inventory of the typical store represents the largest single... Read More

How to Use Annual Report

There are many steps in calculating the fair value of... Read More

The Biggest Oil Opportunity in the World ? And How You Can Profit From It

Where is the second biggest deposit of oil reserves in... Read More

Shareholders Meeting Changing With Times

A significant number of corporations that settled accounts in the... Read More

What is an Investor Ready Business Plan

A Business Plan, as all good entrepreneurs starting out in... Read More

Shop More, Save More for College Gimmick or Reality?

The man sat in a chair beside a dressing room... Read More

How to Invest Your Money

Think carefully on how to invest your money because if... Read More