Editor’s note: Today, we’re handing the reins over to trading legend Larry Benedict…
Longtime readers may remember Larry. He’s been a professional trader for nearly 40 years since his days on the floor of the Chicago Board Options Exchange in the 1980s.
Back when he was running his own hedge fund, he went two decades – from 1990 to 2010 – without a single losing year.
That winning streak earned him a chapter in Jack Schwager’s 2012 book on some of the world’s greatest moneymakers, Hedge Fund Market Wizards.
He attributes much of his success in trading to his rock-solid risk management strategy… a huge part of which is knowing when to cut your losses and exit a trade that isn’t going your way.
Read on for more from Larry…
What’s the best way to make money in the markets?
Believe me, it’s a question I get all the time.
Especially given my profile as one of the traders featured in Jack Schwager’s Hedge Fund Market Wizards.
I’m in that book in the chapter just after billionaire Ray Dalio. And my inclusion came off the back of a long winning streak that saw me rack up 20 winning years in a row.
What’s more, during my career I made over $1 million on a trade more than 500 times.
Of course, when most folks ask about making money, they expect me to reel off a whole lot of technical jargon…
Like key levels on a chart, crossover points in technical indicators, or reversals in momentum.
And to be fair, these all play a part in my trading.
But the single most important thing that made me successful as a trader was something far simpler than that…
It was my strict commitment to risk management. I just hated to lose money.
After blowing up multiple accounts and having to start over, I swore that I’d never put myself in that position again.
Don’t Ride Losers
What new traders often miss is that there are countless opportunities in the markets every day. When I ran my hedge fund, I often made hundreds of trades in a day.
And with all those trades, I was happy to bank lots of tiny profits. It was the accumulation of all these small winners that snowballed into something much bigger over time.
But what I didn’t do (and I was an absolute stickler for this) is that I wouldn’t ride any losers. The moment a trade went against me, I exited it right away.
No sulking or “what ifs.” Nor were there any thoughts of “let’s just give it some more time.” Instead, I just closed out any losing trade and moved on to the next one…
By doing this over and over, exiting a trade for a small loss became something I did automatically. I never got emotional about it.
And that helped stop those small losses from turning into something much larger and potentially putting me out of the game.
The other thing I did was quickly cut my position size if a series of trades went against me. It would typically only take a 2% drawdown in my account for me to cut my position in half.
And if for whatever reason I kept losing, I would either cut that position in half again… or simply switch off my computer and go for a walk.
Only when I turned those losses back into profits would I look to go back to trading my original position size.
Remember, you never go broke taking a profit. But not taking a loss is a surefire way to blow up your account.
I’ve seen this mistake destroy countless trading careers.
Focus on Risk Management First
Too many new traders are only interested in the first part of trading. That is, how much money they can make.
But the way I see it, they’ve got it backward…
Instead, the key thing to ask first is the maximum you’re prepared to lose on any trade. And then to stick to it no matter what.
By strictly capping your losses, you’re protecting your capital to keep you in the game long-term.
Understand this and apply it to your trading. It will surprise you how quickly your profits grow.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict