Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / Small Caps Are Making Day Traders Rethink Position Sizing
Transcript
- Lucas: So the Russell 2000 just put up three and a half percent in five days. The VIX dropped below 17. And I think a lot of day traders are looking at their screens wondering — do I size up into small caps or is this a trap? Luna: Yeah, 3.4 percent exactly on the RUT. That's more than triple the S&P 500's move in the same window. And the VIX falling 7 percent alongside it — that's a pretty clear risk-on signal. Lucas: Right. The VIX at 16.74 now, down from over 18 just a couple weeks ago. And the VVIX — the volatility of volatility — barely budged, down 0.03 percent. That tells me the options market isn't pricing in a crash scenario. It's just normalising. Luna: Normalising, but not complacent. So the question becomes: if a day trader wants to ride this small-cap momentum, how do you size the position differently than you would for a large-cap name? Lucas: That's the exact question I want to drill into. Because if you trade Apple or Microsoft, beta is roughly 1.2, 1.3. A one percent move in the S&P might get you a 1.2 percent move in the stock. But small caps — think of a stock like Chart Industries or a regional bank like Regions Financial — beta can be 1.6 or higher. And liquidity is thinner. Luna: So your standard 100-share position on a $50 stock — that's $5,000 risk — could swing $80 or $100 in a minute on a small-cap name, versus maybe $40 on a large cap. That changes the math on your stop-loss. Lucas: Exactly. And a lot of traders I talk to use a fixed percentage stop — say 2 percent of the stock price. On a $50 large cap, that's a $1 stop, so you lose $100 on 100 shares. On a $50 small cap with higher volatility, a 2 percent stop might get triggered by random noise. You need to widen it to 3 or 4 percent, which means your risk per share is higher. Luna: So either you shrink your position size to keep the dollar risk the same, or you accept bigger swings. Which is the right move right now? Lucas: I'd argue shrink the position size. Let me give a concrete example. Say your maximum risk per trade is $200. On a large cap with a $1 stop, you can buy 200 shares. On a small cap with a $2 stop — because you need to give it room — you can only buy 100 shares. Same dollar risk, half the shares. That's the adjustment. Luna: And that's assuming the stock behaves. But small caps can gap through your stop overnight. The Russell has a lot of names that don't have options liquidity to hedge. Lucas: Right. So you also have to think about time horizon. If you're day trading small caps, you probably want to be out by the close. Hold it overnight and you're exposed to gap risk from something like a China trade headline. Speaking of which — the APEC meetings last week showed the U.S. and China remain far apart on trade. That kind of macro uncertainty can hit small caps disproportionately. Luna: Small caps are more domestically focused, so in theory they're less exposed to China. But sentiment is contagious. If the S&P drops on a trade war headline, the Russell often drops more in percentage terms. Lucas: Yeah, beta works both ways. So the trade right now — if you're playing small-cap momentum — you want to be selective. Look at volume profile first. A stock that's trading above its volume-weighted average price with increasing volume is confirming the move. If volume is declining on a rally, that's a red flag. Luna: And the Russell's rally this week — 3.4 percent — did it come on increasing volume? Lucas: It did. Volume on the IWM — the Russell 2000 ETF — was about 30 percent above its 20-day average on Wednesday and Thursday. That's real participation. So the move has legs, at least short term. But the question is whether it's a regime shift or just a mean-reversion bounce. Luna: We should also talk about the other side: the VIX at 16.74 is below its long-term average of about 19.5. That's not extreme fear. It's more like 'cautious optimism.' Which historically has been a good environment for small caps to outperform. Lucas: Yeah, the VIX below 20 and falling is usually a green light for risk assets. And we have the Dow at 50,580, up 1.8 percent in five days. The NASDAQ up 1 percent. So broad-based gains, but small caps leading. That's the classic 'risk-on rotation' pattern. Luna: Which brings us back to position sizing. If a trader wants to allocate, say, 20 percent of their day-trading capital to small caps right now, how do you implement that? Lucas: I'd start with half your normal position size. See how the stock handles the first hour. If it's trending with good volume, you can scale in. If it's choppy, you stay small. And always set a stop based on the stock's average true range, not a fixed percentage. On a small cap, ATR might be 2 percent of the stock price; set your stop at 1.5 times ATR, so about 3 percent below entry. Luna: That gives the trade room to breathe without blowing up your account. And you can always tighten the stop once you're in profit. Lucas: Exactly. And one more thing — don't chase. The Russell is already up 3.4 percent in a week. If you missed the entry, wait for a pullback. Small caps tend to retrace 30 to 50 percent of a move before continuing. That's where you want to buy. Luna: So the playbook: half size, volume confirmation, atr based stop, buy the pullback. That's a solid framework. And Lucas, I know this is a bit off-topic, but something you said about risking $200 per trade — that's exactly the kind of practical detail that makes this show useful. And I'm realising that the reason we can talk about stuff like this without any ads is because of a handful of listeners. Lucas: Yeah. It's not a huge number, but some folks chip in monthly through buy me a coffee dot com slash fexingo. And that literally covers the costs of producing this many episodes — hosting, transcription, all of it. So if you've gotten value from these conversations, that's the only way it keeps going. No ads, no sponsors, just listener support. Luna: Exactly. And it's completely optional. We're not going to guilt anyone. But if it's helped you think about a trade or a decision differently, that's what we hear from the people who do contribute. So — back to small caps. One angle I want to explore: the China tech rotation we've seen this week. Lucas: Right. Huawei announced plans for new smartphone chips this fall, and that's heating up rivalry with NVIDIA and Apple. But the interesting thing for day traders is how China tech stocks traded in the U.S. — names like Alibaba and JD.com — they've been volatile on the headlines. Luna: And those are large caps, but they move on different drivers. Not exactly the same as small caps. Lucas: No. But the broader point is that macro headlines — trade, chips, APEC — they create intraday swings. And if you're day trading small caps, you need to be aware of the news flow that could shift the whole market's risk appetite. That's why I watch the VIX and the Russell together. Luna: So to wrap this up: small caps are offering momentum, but they demand stricter position sizing and wider stops. Use volume to confirm, buy pullbacks, and don't hold overnight in this macro environment. Lucas: And if you want to keep hearing us break down trades like this without interruption — you know where to find us. Buy me a coffee dot com slash fexingo. Otherwise, see you tomorrow.