10 Reasons to be a tastytrader | Trade Small Trade Often
Oct 27, 2016
By: Josh Fabian
It is the third tenet of tastytrade: “Trade Small, Trade Often.” But what is “small” and what is “often?” Tom, Jenny, Jim and James joined Dylan to discuss.
One of the most important keys to trading is positioning ourselves in a way that probabilities work in our favor. As Jim pointed out later in the episode, there is mathematical evidence supporting the argument that eventually, probability numbers converge. That is why we trade probabilities much more than directional opinions (yes, we trade opinions; we’re human and worse, traders with egos to maintain). However, in order to take advantage of probabilities, a trader needs enough occurrences (trades) on the board.
Tom kicked off the discussion around “often” using a sports metaphor. Take Cubs first baseman Anthony Rizzo (c’mon, the Cubs are in the World Series for the first time in forever). When Rizzo has two strikes against him, he moves his hands up on the bat. By doing so, he gains greater control of the bat and tends to put the ball in play more often, albeit, with less power. More balls in play, greater chances of getting a hit. Putting the ball in play is like trading often.
So, how many trades do we need exactly? And what is “often”? Jenny tends to trade three to five times a day. Currently, she’s maintaining about twenty different trades. But is twenty positions right for everyone? Not necessarily.
The fact of the matter is, “often” is somewhat subjective. However, we can quantify it somewhat. Tom has discussed many times keeping somewhere between 20% - 30% of his account value invested. When volatility is higher, he gets more aggressive. Perhaps that percentage will jump as high as 50%. Therefore, depending on volatility, we want 20% - 50% of our capital invested. That is a starting point for how much money we want in play. Step two, trade small, helps us with allocating those funds.
Trading small might mean several things. Perhaps, as James mentioned, small means trading in products proportionate to your account size. Jim gave the example of selling one strangle in SPY. The buying power for one strangle is around $4,000. That trade might be appropriate in a $100,000 account. On the other hand, in a $20,000 account, that trade is using up too much buying power.
When too much buying power is allocated to a single position or even just a few positions, that account is too concentrated to gain any statistical edge. Jenny emphasized the importance of this point when she said that you never want to have one product or position monopolize a trading account. If an account can be made or broken by one position, the position is too big.
As a general rule, allocating about 1% - 2% of buying power to an individual trade makes a lot of sense. Those are “small” trades. By keeping trades small, we have the ability to create more occurrences. Creating those occurrences is where we gain a statistical edge.
Trade small, trade often is really one single idea. “Small” is what allows for often. “Often” creates a statistical advantage of being profitable. Trading small and trading often leads to profitable trading (and to think people said taking a Philosophy 101 course discussing syllogisms was a waste).
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.