Caution: Manage Risk
Learn to manage risk. Or watch your account pay the price...
The best loser wins.
Repeat that to yourself a few times and try to process it. What does that mean?
It means the trader who can take a small loss, accept they were wrong, and move on to the next opportunity is the trader who ultimately gives themselves the best chance to win big over time.
Everyone wants to make money in the market, but your focus should actually be the opposite.
How do I lose less money when I lose a trade?
The best traders will tell you this game isn’t about how much you win when you’re right, but how much you lose when you’re wrong. If you don’t have good risk management skills and can’t keep losses small, you’re not going to last long as a market participant.
You should only have four outcomes while trading:
Big win
Small win
Breakeven
Small loss
That’s it.
You shouldn’t even allow yourself to have big losses. One big loss can wipe out days, weeks, months, or years of progress if you’re not careful. The only person who can prevent a big loss from happening is you.
Many of the best traders often have a win rate of less than 50%, and many far less.
Why do they succeed? Because when they win, they win big or small. But when they lose, they only lose small.
Qullamaggie:
“A lot of traders try to go for a higher win rate — to make money on more trades… I like to catch the big winners and have a very low win rate. In 2020, I had insane returns, and only had a 35% win rate. In 2019, my win rate was 25%.”
Peter Brandt:
“Most traders I know are right no more than 40% or 50% of the time. This means they are wrong and take losses on 50% to 60% of their trades.”
Paul Tudor Jones:
“The most important rule of trading is to play great defense, not great offense.”
Stanley Druckenmiller on George Soros:
“Soros is the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position.”
You get the point.
The best traders and market participants of our time emphasize that losing is inevitable. What isn’t inevitable is big losses.
If you’re not already in the subscriber chat, I strongly suggest paying attention to it.
This is where I post a daily thread with my thoughts on the day ahead, relevant headlines and macro events, my main focus names, notable upgrades and downgrades, and anything else I’m watching.
The chat itself has basically become a live market group chat. We have a ton of smart people sharing ideas, setups, headlines, and observations throughout the day, and there’s a lot of genuine alpha being passed around.
I honestly think it might be one of the most (if not the most active) subscriber chats on Substack.
This is also where I post new position threads and walk through the thesis behind each trade, including what I’m seeing, why I’m entering, my risk level, etc. My two new positions from today are two positions nobody is talking about that I think have some serious upside…
Come join us!
In the remainder of this article I’m going to discuss my personal risk tolerance and risk profile, how I keep my losses small, how you can identify clean spots to risk against, the win/loss math you need to understand to come out ahead, why protecting your downside is ultimately what allows you to stay in the game long enough to catch the big winners, the biggest mistakes traders make, and much more.
This is arguably my most important article to date, and I strongly suggest everyone takes the time to read it. Learning to lose small is (in my opinion) the most important aspect of trading.