We’re used to thinking about how our mindset influences our trading, but our trading also influences our psychology.
We increase the volatility of our returns by extending our holding period.
Holding trades for a longer period of time is essentially sizing up.
If we trade too large over a longer holding period, the negative movements may be too much to bear.
We must size positions so that they matter if they work out but do not cripple us if they do not.
We can’t win if we don’t stay in the game.
A second trading adjustment is that I will start small and only add if I see growing evidence that a top/bottom has been established.
I’m not attempting to identify precise tops and bottoms.
If I anticipate a strong market move, I don’t need to capture every tick.
Finally, I think it’s important to distinguish between the trade and the underlying idea.
The trade is simply a way to structure a good risk/reward in pursuing the idea’s opportunity.
If the trade does not work out, I want to stay mentally sharp and consider what I would need to see to re-enter the market.
That is only possible if the initial trade is small enough to allow for a re-entry.
In short, we want to trade with full awareness of the possibility that this particular trade will not work out, so that bailing out is not considered failure, but rather an opportunity to reconsider the idea.