Editor’s note: Today, we’d like to share an insight from Market Wizard and colleague Larry Benedict.
It’s a tip he learned in the early days of his career trading on the floor of the Chicago Board Options Exchange in the 1980s.
And it’s helped make him one of the world’s most prolific moneymakers today…
When I talk to folks about trading, there’s one question I know I’m always going to get…
After skirting around it with a few warm-up questions, they finally can’t wait any longer.
They lean in… and often in a hushed voice ask me what’s the most I’ve ever made on a single trade.
I get it. And I know they’re expecting a big-time story…
Like when George Soros made over $1 billion in a day back in 1992 in a massive currency bet against the British pound.
But the truth is, I simply can’t remember…
Although I’ve made $1 million on a trade more than 500 times, there’s no single trade that stands out.
What’s more, those folks are asking the wrong question.
Today, I want to share with you the one question you really should ask instead…
The Trader’s Spiral
I started out on the trading floor of the Chicago Board Options Exchange almost 40 years ago. And back then, I focused on only one thing… crazy, outsized profits.
I’d bounce from one trade to the next as I tried to get onto the next hot thing.
But instead of big profits, I was soon faced with eye-watering losses…
My losses were so devastating that I ripped right through my trading accounts multiple times over.
The harsh reality I learned was that going for home-run trades was a surefire way to go broke. The odds are simply stacked too far against you. It’s a basic question of math…
Given that everyone has a limited amount of capital, you only need a few trades to go against you to clean out your trading account.
Put simply, for every “George Soros” trade, there are countless others that don’t work out.
And it’s the trying to get the lost money back that leads traders down the spiral of taking bigger, riskier bets.
That leads them to blowing up their trading account…
The Most You Can Lose
Only when I started asking the right question did I turn my trading around…
Instead of thinking about all the potential huge profits on offer, I learned to ask myself: “What’s the most I can lose on this trade?”
After losing money over and over, I finally learned to tightly control risk management.
By not getting caught up in the emotion of how much I could make, it ensured that I didn’t suffer a catastrophic loss.
Once a trade started going against me, I quickly exited it.
What’s more, if my losses grew to more than 2.5% of my account in any month, I’d quit all my positions and start fresh the following day.
What I didn’t do (and what so many traders mistakenly do) is sit around hoping for my losing position to turn around. That’s what turns a small loss into something much bigger…
I’d then typically cut my position size in half until I started consistently making money again.
I know that the allure of huge profits is what attracts so many folks to the markets. But the thrill of chasing big gains leads to poor risk management.
Protecting your capital is sacrosanct as a trader. Once you lose it, you’re out of the game.
I learned to put risk management first and accept losses. And once you learn that too, it will vastly improve your chances of making it as a trader.
Happy trading,
Larry Benedict
Editor, Trading With Larry Benedict