100% Winning in Trading — Part I: First Move

We all like to win. Nobody likes to lose money. However, the study shows 98% of people lose money in trading in the long run. Moreover the more they trade, the more they lose. What’s the problem here?

The problem, as it starts to come to me, is that when it comes to trading, people tend to behave a bit differently. Suddenly he/she enters a bubble that the millionaire or homeless happens tomorrow. So it’s not just all about the hype, but also tremendous of fear that make us differently in trading.

This slightly contradicts to our attitudes towards real life. Even though we make mistake in general life, we don’t tend to lose a lot. Instead we tend to learn our lesson and remarkably recover very quickly and move on, like nothing happens. Interestingly enough, most of people think they are the winner of their life eventually. So why do we rarely hear that in trading? The answer to this question should be profound indeed.

Trade Vic

I’m not going to teach you any technique in trading, instead I’ll be merely share a method someone has invented couple of decades ago. Most likely he didn’t invent it, but documented very well in his book “Trader Vic”.

“Say I’m a young gun with $50,000: my initial bet will not exceed 10%, $5,000; and my loss will have to be limited between 10% to 20%, $500 to $1000 range. “ — Trader Vic by Victor Sperandeo

The method can start very simple: you only do to 10% of what you allocated for the investment as your first move, and try as hard as you can to limit the loss to be 10% to 20% of that, which is 1%-2% of the actual amount. $50K matches to $500 to $1000 loss, $3K goes to $30 to $50 loss and etc. You might also heard 3% rule somewhere, then take this as the detailed version of the 3% rule then.

I’ll take $50,000 as an example using the picture below to illustrate what he meant.

We set a limit (mostly for the loss) for the trade. And this limit is not directly applied to the base, instead it’s applied to the initial betting, a single move. In the end, the limit is quite small with respect to the base, say 1%-2%, visually in the above chart, it’s kinda of small.

Notice, we don’t use the gain that often here, at least not right now. Analogy to the common life, we are more concerned about our kids falling from the stairs initially, not too much in how fast they can run as a baby. If they can run fast, that’s a surprise; but the fall is almost inevitable. As much as we don’t like the accident, we tend to come up a plan to minimize the severe fall off the stairs. What do we do as a parent? I don’t know exactly. But one common one is to let them fall, but maybe let them do to the not-too-scary stairs first?

We mentioned the base. You can think of the base as sort of your expectation, or what you ever can have. But I’ll say the most comfortable number can be a start. We picked $50,000 in our example. But please take your time to put efforts in coming up the right number. Don’t rush into this step by just assuming the number. When I was young, the most expensive lesson is don’t-know-how-much-you-are-worth. It’s hard to admit you don’t worth much financially: but I will show you in this series, the smaller this number, the better it protects you.

We also mentioned the initial. Though not clearly emphasized, it hinted that this betting isn’t a one time thing! It’s never a one time thing, trust me my friend, this is a bloody lesson you will have to learn anyway. Think of the initial as your first attempt, take 10% what you have from the base and buy something what you think is worth to have. Remember, since this is not your only move, it’s not gonna be 100% or even 200% what you have. Just 10%, if you want to do less than that, I have to say, it’s not a bad choice.

We finally mentioned the limit. To be honest, in most of people’s dictionary, there’s no such things as a limit. Normally before you run out of the money, you naturally know your limit. But the problem is that if you ever lose more than 60% of what you have, most people aren’t going to recover happily. Not to mention, if you lose 100% or even 200%, it’ll the blow to yourself and whoever around you.

Therefore, a limit is a must-have before you start this journey, especially professionally. If you want to win eventually, you better know how far you can afford to lose. Don’t pay attention to the movies you watched, they are there to inspire you, but not to kill you. You are the one who should be responsible not to kill yourself accidentally!

If you haven’t noticed already, a limit is small with respect to your base. Maybe others have more to lose, but not you. You don’t have much to lose, and moreover what’s lost is hard to be re-gained without the proportional effort. If you can have the choice to win, why lose.

Summary

I’ll stop here as the part 1 of 100% winning series. My take home message for all of you is, know how much you have, how much you want to use as your first move, and know how much you can afford to lose from that move. Yes, they’re all preparation work, but you need them on your judgement day.

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Fang Jin

Fang Jin

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Front-end Engineer, book author of “Designing React Hooks the Right Way” sold at Amazon. On my part time, I’d like to share my view in current economics.