There’s a really simple question that cuts right to the core of what trading is all about:
Let’s say you and I are playing a game. You will win 99% of the time. Every time you win I will pay you $10,000.00
How many of these games would you like to play?
Let’s do the math on this and play 100 times. You win $10,000 times 99 or $9,990,000.00. Wow! Now that sounds awesome.
But the question remains how much money do you lose when you lose? $10,000? $100,000? $10 million? $1000 million? $1 billion? Without knowing the answer to this question, you really can’t determine whether or not you should play.
Let’s cement this concept into your subconscious trading mind:
It is not how much money you make when
you are right that is important.
What IS Important is how little you lose when you are wrong.
The losing transactions in your trading career are the ones that you need to study thoroughly. They are the trades that will allow you to learn and understand the nuances that differentiate great traders from wannabes.
Rules of the Game
(The Cliff Notes)
- Trading can be an arena of huge egos.
- Braggarts are everywhere proclaiming their dominance.
- Traders all love to scream how much they are making.
- Your function and purpose at the outset is to track your trades and study your losers.
Let me show you real quickly how important this is.
One of the most successful commodity traders of all time was Richard Dennis of C&D Commodities. And, while it may be very hard to believe, Mr. Dennis lost on 90% of his trades.
Stop and think about that!
Years ago, Mr. Dennis’ system for trading was released in the form of a book by one of his employees whom he had mentored. Despite the fact that his system had made him hundreds of millions of dollars, do you think you could effectively trade it?
With a 90% losing percentage, chances are it would be very difficult to stomach.
In the world of trading, it is never about how much you make when you are right. It is always about how little you lose when you are wrong.
Nobody likes losing money. But your long-term success will completely depend on keeping your losses manageable.
Here’s the secret to trading success: (One Sentence)
Manage your risk, or it will manage you!
Make it count. It’s not magic. It’s machine learning.