Today I’m going to share with you the absolute biggest unlock to my trading success. It’s more important than the trading strategy itself, and it isn’t even a close comparison.
This changed everything for me.
In my last email I shared with you one of my core trading systems.
If you missed it, you should go back and review it first. Take a look here [LINK]
The system is simple, but not too simple.
Price action and understanding what is causing the move is the edge, our advantage here. I first built this system before the Global Financial Crisis in 2008, and it still works today.
That’s what we’re looking for, a system that withstands time.
But a system isn’t just about the entry trigger, the why and when to get in, that’s part of it, but to make a real system, a robust system, we need to add other components.
If being successful as a trader was only about knowing when to buy and sell, then everyone would be able to do it.
How many times have you tried a system that was successful on paper, but when you started trading it live, it flopped?
This happened to me over and over on my trading journey.
Talking with other traders about their issues, it seemed to be a common theme for them too.
“Sometimes the system just doesn’t work.”
That was unacceptable to me, there had to be something that I was missing. I decided to go back to my last 100 trades to see if I could figure it out.
Like many traders I read the book, The Market Wizards, by Jack Schwagger.
That’s when I came across this quote by Bruce Kovner.
“Novice traders trade 5 to 10 times too big. They are taking 5 to 10 percent risks per trade. They should be taking 1 to 2 percent risks per trade.”
Of all the investors that I’ve studied over the years, Bruce’s style has always resonated with me. Starting with $3,000 dollars, he became a billionaire compounding returns at 87% for over a decade.
Here’s his chapter from the Market Wizards Book
This hit me like a ton of bricks.
In fact, the common theme in the Market Wizards book is risk management. I collected a bunch of quotes from this book where the best investors in the world, the Market Wizards, all talk about risk management and position sizing.
I decided to take a look at my trades risking 1%, as Bruce Kovner suggests. Because up until then I was just trading the standard 100 share lots.
I was trading stocks at this time.
Using the system I shared with you yesterday, let’s test the difference between trading a fixed position size vs 1% risk per trade.
By the way, today’s trade using this system was a loss on NQ Futures.
This system has a 60% win rate, 60 winners, 40 losses in 100 trades in this data set that I used.
Account Balance $50,000
Average Points Win 3.05
Average Points Loss -2.01
Let’s look at what the results are for this system trading 100 shares per trade.
By all means, that is an excellent result. But let’s see if we can’t tighten it up a bit, instead of just taking 100 shares per trade, let’s risk 1%.
That doesn’t mean I buy 1% of the account balance, 1% of $50,000 = $500. That’s about 1 share of $QQQ
Risking 1% means if my trade is a loss, I lose 1% or $500. If the account goes to $60,000 then I’m risking $600, the risk stays the same as the account adjusts.
I did nothing different here, other than adjust my position size. These were the exact same trades, with the exact same entry, stop loss and exits.
Looking at them side by side, it’s nearly 2X the returns for the exact same effort.
This was the biggest unlock of my trading journey, and it isn’t even close.
Position sizing isn’t just about maximizing your upside. It’s also about containing your downside.
You could easily go on a 10 to 20 trade in a row losing streak, and as long as you keep your risk % the same, it keeps you in the game…instead of blowing up your account.
Ultimately my trading has evolved from taking trades on how I feel, to trading a system, to dialing in a system to make it work.
A lot of people sell you on the idea that trading is easy if you just master this one magic setup.
I disagree. There is so much more to trading than just finding a simple setup.
It takes focus, discipline, and effort on a daily basis. You are competing against the most well-funded apex predators in the world.
I’ve been at this job over the years because I put in the effort every day to stay disciplined and improve.
Every morning, before the trading day, I go through my Trading Plan.
My Trading Plan has everything I need to keep my head in the game, keep me focused, make sure I’m doing what I need to do to accomplish my goals.
I’m happy to share it with you. Hopefully, you can take it, make a copy and make changes to make it your own.
There’s a whole framework to come to all of this. Backtests, planning, research and then building a plan to end up here.
Be on the lookout for tomorrow’s email, where we dig in to it.
Happy Trading
