Stockcoach's Corner

Up 0.4 percent today. It was another one of those days. I was happy to see my portfolio rise, but a little annoyed by how much better the Russell 2000 did.

One blogger that I follow quite a bit is Charles Kirk (I like his site so much that I even pay $50 to be a member. In fact, his website is the only trading resource that I pay money to use). His style is quite different from mine. I tend to base my trading decisions on a company's fundamentals whereas he leans towards technical analysis. He is also much more short-term oriented that I am.

I must say that his trading record is nothing short of amazing. Yet, with success comes a price that I think many short term traders have not considered (although I'm sure Charles has thought about this many times). You see, if you are successful, your account will grow very quickly, but as your account grows, it will become increasingly difficult to deploy that cash on a consistent basis. This problem is particularly acute for daytraders. Imagine having $1 million in an account and having to trade that much money every day, always closing one's positions before the end of trading. Unless you are trading extremely liquid stocks, it will be impossible to get in and out without moving the price against you. That poses a problem because the best risk/reward scenarios are often in smaller less liquid stocks (this is also true for fundamentals-based investing, which is why I focus on smallcaps).

Thus, I find that many short-term traders who have large accounts are often sitting on huge cash hoards. Even though they can still make big profits on the trades that they make, because their average trade size is a small fraction of their total account, they still have trouble outperforming the indices in percentage terms.