Let's put it another way. How much risk do you take on each trade? Risk too much and not only will you have huge drawdowns in your equity but you can even risk a complete blow up. Risk too little and your returns will simply mirror the averages.
I have taught this lesson the hard way. Like a child he keeps wanting to place his hand on the hot stove and being told not to do it as they will get burnt. It seems the only way to learn the lesson is to let them put their hand on the hot stove, get burnt, and unless they have a screw lose, they will not be doing that again. Same with position sizing or risk management. Everyone has heard the "only risk 1-2%" of you equity on any one trade. BUT it's something everyone of us battles with. You know greed and fear are the biggest motivators in life and in trading. Did you know GREED is by far the stronger of the emotions. Master GREED and you master trading. The stock markets are a mirror of human emotion.
I always say this. you log in and see your stock prices. A stock is up 10% that day. It gapped up. Are you exited about this and counting the money you have made on this one move? If so, you are probably over trading. Another way say you log in and the stock has gapped down 15% on bad earnings. Whilst no-one likes this the degree of your discomfort will determine how heavily you are trading each position. If you can shr it off without too much sweat you are trading ok. If you get violently sick and throw your computer out of the window ….. you are probably overtrading.
Imagine you go to your bank (pre 2008) and ask for $ 1m to invest in the stock market. They say fine we charge 8% interest. so that's $ 80,000 pa interest. You are happy about this. You know if you can make 20% or $ 200,000 and pay back the $ 80,000 interest you make $ 120,000 profit. But there are no guarantees. What if it is bad year? Would you be gambling away wiling to lose 50% + in order to make 60% + returns with the banks money? You would not. You would trade with small risk knowing even at 20% profits you are going to make good money. no need to gamble. So …. why not adopt this attitude with your trading account now? Once you "blow your account" it's game over. you start from scratch again. Take 1% -2% maximum risks per trade and that way you are not bothered about averse price reactions one way or the other. Your trading like it's a business instead of a hyped up gambling, ego trip.