When Should Developing Traders Increase Their Tier Size?

A reader writes:

If you don't mind, I have a question for you. How long should a trader trade at a given tier size before they move it up? I don't want to jump in larger too fast, but I don't really know what an optimal time frame is for advancing, and I'm sure it varies from trader to trader. Is profiting $100 on 100 share tier size, with a max position of 100 shares per trade, an acceptable daily average? I know it's not a 1:1 ratio no matter the tier size, as 1,000 shares, for example, could affect the order flow, where 100 shares probably won't (in most stocks anyway). I also realize that just because you average $100-$200 per day trading, 100 share tier size that doesn't necessarily mean you will make $1,000-$2,000 per day on a 1,000 share tier size (not to mention if 1,000 shares is your max, you shouldn't just jump right into 1,000 shares on a trade).

I'm sure it varies and I have heard different philosophies, but anything you can throw out that I can use to help gauge myself would be great. I am doing well at my current level, but I don't want to get too cocky and jump into trading more size until I'm sure I can trade 100 shares with success, consistently. I just don't know how long "consistently" is...

You are correct that trading 100 shares is very different than trading 1000.

Let's take a step back and put this question into context for the new and developing trader. Doing so makes all the difference for how a new trader attacks his start. There is one camp that has its traders start slinging around 1000 share lots from Day 1. My firm's teaching philosophy is to start new and developing traders with 100 shares and then bump up the hardest-working and performing traders very quickly, while still having them focus on what is most important -- building their trading foundation.

I cringe when new traders talk money in their first eight months. You are not in this game to care about any small sums of profits you might make when you are not anywhere near your peak. When you start, what's most important is to develop good habits and trading skills, leverage your strengths and build your playbook. One of the skills that you will have to develop is trading with more size. But this is just one of many skills that you must learn, granted an important one. Too many new and developing traders overvalue trading with more size over even developing the most basic trading skills, like reading the tape. This is a path to a short trading career.

Now having said the above you must constantly keep pushing yourself outside of your comfort zone. Advice I often share with new traders is to find a set up that made the most sense to you intraday and obsess how you could have responsibly traded that opportunity bigger. This is the road to trading bigger profitably.

I like your approach of being profitable at 100 shares before heading higher. Generally, I suggest using 10 days of trading data before making a determination to trade bigger. With some diligent traders, less data is acceptable. It sounds like you are well past this point and time for the next leap bigger. I have found that there is little difference in trading 100 and 300 shares for most stocks. I have found that most traders who can trade 100 shares consistently profitable can even probably trade 600 shares well.

For traders that I mentor I am most concerned with the work they are doing to build their foundation. I will look at their trading data for signs of consistency, managing risk, and the ability to make money. You want to see only one day (out of 10) where the trader was stopped out and at least three days where he exceeded his intraday stop limit by 3xs. But if a trader isn't watching the tape after the market closes then he's not getting bumped up. If he's not keeping a trading journal then he's not getting bumped up. If a trader is working on building his playbook, working on his trading game everyday, and his results are decent, then I will push that trader everyday to get bigger. I recommend getting bigger with plays that make the most sense to you.

There is no exact science to how a trader should be bumped up. It is part work, part performance, part stepping outside your comfort zone and part individual mentoring.


Editor's Note: This post was written by Mike Bellafiore of SMB Capital.

Twitter: @smbcapital