January 21, 2022
1,094

This is a repost from my former colleague Chris Irvin that I worked with at Wizetrade. You must seriously take this into consideration if you want to be consistently successful in trading the markets.

Kipp

 

Okay, your a trader and you have been struggling with money management. When you use a stop

loss it seems like you are taken out of almost every trade, sometimes prematurely and

sometimes not.  When you don’t use a stop loss you get  some wins and some really big losses.

It is getting very frustrating – not to mention expensive.

 

Here is something to consider.  In any one trade there are five possible outcomes.

 

  1. Big Winner
  2. Small Winner
  3. Even / Flat
  4. Small Loser
  5. Big loser

Only one of these possibilities, “The Big Loser,” has the potential to destroy your account.

The best protection from the big loser is a wisely positioned stop loss that limits your

exposure.  In the book ” Millionaire Traders” by Kathy Lien and Boris Schlossberg, there is an

interview with a trader referring to himself as Indi Jones.  His claim to fame is that he took

at $25,000.00 trading account to $1,000,000.00 before he was 30 years old.  On page 210 Indi

gives us his thoughts on risk.

 

“…the number one rule in trading is the same as the number one rule in boxing, which is to

always protect yourself.  “No capital, no trading, no life,” he states succinctly.  So how do

you protect your capital?  Always know your worst-case scenario.  Before you place the trade,

figure out what you are willing to lose in terms of points, ticks, and dollars.  Check your

risk/reward ratio and make sure that no one trade has the potential to destroy your entire

account.  As a general rule of thumb, Indi Jones does not like to lose more than 5 percent of

his equity on a single trade.  This way, even if the trade becomes a loser, he can still

survive to take another swing at the market.”

 

Indi is really eliminating the big loser.  Once the big loser has been dealt with, you are

left with four possible outcomes in a trade.

  1. Big Winner
  2. Small Winner
  3. Even / Flat
  4. Small Loser

 

With these four possibilities still in play, logically, how does our trading work out?  With

average ability to recognize proper entries, your small winners and small losers should cancel

each other out.  If that happens, you are left with two possible outcomes:

 

  1. Big Winner
  2. Flat / Even

 

If these were your only two outcomes you had do deal with in your trading do you think you

could make some money?

 

Happy Trading.