Is a difficult subject, in many ways
A true constraint that´s tied to a personal metric we can´t do much about when first heading into trading.
The size of your capital base will either expand the number of tools available to you, or limit them.
And if you ask me, the absolutely hardest type of trading one can do is the one with a shallow capital base. Simply because you lose so many “safety net tools” upon making a decision about a position.
Not only does a shallow capital base require you to first understand the market and price behavior. But also requires you to make binary decision at the right time as well. There´s no room for “safety net tools”, as using those will come with a cost like transaction fees.
Some common "safety net tools" are:
Scaling
Partially closing or adding to a position as it develops.
Hedging
Offsetting exposure with a correlated or inverse instrument.
Counter position
Opening a position in the opposite direction to neutralize exposure temporarily.
These are some of them, and there are more advanced ones as well. But all of them will demand transaction fees.
Transaction fees that will cause a lot of impact to the shallow capital base by default.
If we accept that we don´t have access to the “safety net tools” then we´re exposed to making the correct action at the correct time as well.
Reading the charts and indicators and for example seeing a large deviation, that historically will resolve to the mean. Well, we will face an uncertainty equation. Will the deviation resolve quickly, slower or simply fade?
Scenarios that can be hedged against using the “safety net tools”. But a shallow capital base can´t.
To come out of such a equation on the right side every time, would truly be a astonishing accomplishment.
It´s not so much about the capital, it´s about the loss of options. Options costs fees, fees affect more in a shallow capital base system. It reduces reflexivity. And thus raises demand for precision.
But this doesn´t mean the professional traders/investment banks/institutions target the smaller trader.
There’s no predatory design behind it if you ask me.
I think it´s more closer to let´s say golf or sports in general. A weekend golfer and a tour professional play the same course, by the same rules. The professional has better clubs, better coaching, decades of experience.
The weekend golfer doesn´t have those “safety net tools”, they’re just playing a different version of the same game with different tools available to them.
Markets work the same way I think. The institutional trader isn’t structured against you. They simply operate at a level where different tools are available, and those tools allow them to behave different in situations where the shallow capital base forces a binary call. More options, more flexibility.
Understanding this doesn’t change the constraint. But it changes what the constraint means.
It’s not a personal failure.
It’s an equipment reality. And unfortunately one that’s tilted against the shallow capital base.
But knowing that is the beginning of you playing your OWN game.
