7/13/10 Gimme Shelter/ Playing Small

Oh, see the fire is sweeping
Our very street today
Burns like a red coal carpet
Mad bull lost its way

Think you have ice water coursing through your veins? Nerves of steel? No one does.

Executioners cover their faces. Hit men use adrenaline to their advantage. Gladiators/serial killers get off on the experience.

Everything we do is wedded to our emotions. Apart from a lobotomy (or unless we're playing with other people's money), we can't sever that connection.

When playing countertrend, play small.

I have played with large position sizes in the past. And several times I paid the price. There is just no way to distance yourself from a 6-10-15-25% hit on a large position. It kills the spirit when that happens. I would try to catch a movie, take a drive, or read a book to distract myself until the market reopened, giving me a chance to 'make it back.' It never worked. Instead, the losses cast a pall over any activity, and when the film ended (or I looked up from the pages of a book), the reality of what I was trying to forget came rushing back in like the blast of sunlight/heat outside the theatre.

We can't handle large losses- we're not wired that way.

Of course, for every rule there's an exception. In the spring of 2009 I was able to play with large position sizes in leveraged ETFs. It's easy to say in retrospect that it must have been because the indexes had no place to go but up. But the truth is I don't really know how I managed to hold large volatile positions without losing my cool.

Today? Today I am down -$179.95 while still holding positions in TZA/FAZ. I had one winning trade, which helped. But I'm OK mainly due to small position sizes.

What if you bet the farm on a downside move? Well, I'm not about to tell you it will all work out- I think the market sells off soon, but I don't know that it will. What I can say is that I've been in your shoes, more than once. More than a few times I made it all back by holding on to the position(s). More often I saved my sanity by taking the hit and trading my way back. You'll have to decide.