The number one rule in trading is to keep your losses small. Once you do everything we spoke about yesterday and you find a set of rules or a trading system or a setup, one setup, you don’t need 85 of them with which you’re compatible, then by all means keep your losses small because what you don’t lose, you don’t have to earn back. That was always the way I looked at it is I thought about it like a competition and I’m in a sports game. If I’m down by four runs and I’ve got one more at bat in the bottom of the ninth inning, it’s like the score is against me, but time is also against me. When you start losing into 15 to 20% of your capital, you put a lot of pressure on your money to perform because if I take $1 to 80 cents, now I’m trading 80 cent dollars and I need to take 25% to get back to breakeven.
The money isn’t the real problem. It’s the pressure that you put on yourself to in turn put the pressure on the money. So what happens? You abandon your trading style. You try something new, you do flyers. Sounds sound familiar. I’ve been there. I’ve been there. I’m not selling you a system to cure it. Guess what? Because you are the system. Listen to this channel. Think of every episode as a little lesson to work on yourself. That’s what’s going to help you the most. There’s a finite amount of trading rules out there. The trick for you is to find the combination of them for your entries, your protective stops as your exits. Obviously your position sizing, which is subjective. Do you add to your winners yes or no? If so, how? And then how do you adjust your protective stops without using price targets knowing that the market is omnipotent and if you catch a wave, you should let it run for as long as possible because your goal is to make money not feel good about yourself by posting up a winning trade that gets old quickly.
Now, some of you, depending on where you are in your trading evolution, might have a different number one, but ultimately I know this and everyone in Market Wizards or whomever has said this till they’re blue in the face, and that is you need to keep your losses small. Man, I can’t tell you suppose your offense is struggling, but you’re keeping your losses small. Look, imagine trading one 10th of 1%. Again, I’m talking to beginners and I’m not talking to the folks who are already doing it. If that’s you, go away. This is not the channel for you. This channel is written and composed of content that’s helping the 19 out of the 20 people that are struggling. I don’t care how well you’re doing it, if you’re already doing it well, this channel’s not for you, so don’t be smug because I just delete that bullshit anyway. I don’t care. This is for the people who are struggling.
Say you’re wrong 20 times in a row, you still have 98% of your capital. You could sleep at night and say, hey, I can take confidence and solace in the fact and build confidence in myself that I’m in the game. I’m doing it. I’m risking real money. I’m not paper trading. I have real risk here. This is real money that I had to earn, and that’s going to do more for you in terms of calibrating your makeup, your system, you as the system with your trading rules and your relationship with the uncertainty that comes with trading and the probabilistic outcomes from the markets. It’s really that easy. People tend to make it more complicated. So at that stage, again, you can always scale up. I know you’re not going to get anywhere, but the point of trading is to not lose. Eventually, yes, you have to make money, but that’s at a different stage. That’s junior and senior year of high school. When you’re a freshman and sophomore, your goal is to try to figure out what the hell works, what’s compatible, what you think.
What do you think you can execute day after day after day after day without thinking about it, even if you had very, very strong feelings, you put your bis stop orders in accordingly because you know it’s probabilistic and you know that six times out of 10 you’re going to lose. That might suck, but you still put your orders in. That’s where you’re trying to get because if you’re a person who’s insecure, every entry is going to feel bad for you. It’s going to give you trepidation. Doesn’t matter if it’s a pullback to a certain moving average or down to support. Doesn’t matter if it’s a two day breakout, a two bar breakout or a 55 day breakout. You’re going to have that same, I lacks a sense of security. If you have moving averages, you’ll find a reason to not trust those.
Now, if you’re on the other side and you’re a risk lover, you have to tone it down a bit because everything’s going to look great. Every person’s going to look attractive. Every stock is going to look like there’s an opportunity, and that’s just not practical. So to me, it’s like if you’re just starting out, keep your losses small so that this way you don’t blow up your account and find yourself in a 30, 40% drawdown where it makes a tough situation worse when you’re despondent because you have no confidence at that point, then you have regrets, and you might even have animosity. Why? Because you bought some guy’s AI bullshit and you trusted them thinking that you could buy your way out of your emotional discomfort. Shake your head this way folks a couple times. Feel the feelings because you cannot, cannot buy your way out of discomfort. There is no set of trading rules that you can buy from another person that’s going to allay or ask wage any of these bad feelings that you have in your body. Then ask yourself this question.
Why do you have bad feelings or feelings that you think you don’t like? Is it because you don’t know your ass from a hole in the ground about what you’re doing? So what do you think you’re supposed to be born with knowing how to trade? It’s an acquired skill and it’s experiential. It’s not intellectual. You have to do it. It’s going to take time as long as you stick with it. Persistence and determination has made more millionaires than some of these day trading rules. I’ll tell you that right now, that there was an overlap in that is probably the reason for success. But in any endeavor in life, someone left a nice comment too. I might as well give him a shout out.
It’s from headwind on a video called The Most Powerful Mindset for success. Gheadwind said, Mike, your speeches go far beyond trading. Man, great episode. Thank your headwind. And that’s true, but so much of this stuff is about life. If you’ve listened to this show, if you’re new here, first of all, thank you for being here. I’ve struggled quite a bit. I wrote about that in the book called The Inner Voice of Trading. You can get the audio book version for free. The link is in the description of this very video in every damn video. Exactly because you get it for free and you find that since we are emotional beings, doesn’t mean we’re acting out of emotion. But if you’re not catatonic like Robert De Niro was in the movie awakenings as a human being, you are an emotional being. You might be born with the ability to keep everything in control like I was, and it’s just dumb ass luck. Good for you. But for a lot of people, especially if they’re highly intellectual, they take losing money as a personal failure and they see it as that they are failures. It’s not just that the trading setup lost money, which could be just dumb randomness, right? If you do a thousand trades, 600 of them are going to lose. It’s hard for intellectual people to understand the difference between accuracy versus mathematical expectation, but I’ve seen more people who had really a lot of talent just have a very reckless understanding of risk management, and they had a lot of promise, but they lost so much money, they became discouraged and they quit. And those people are walking around like drones now in careers they don’t want to be in because they have to be in them. They got to make money and they blew their chance, and whatever trading capital or corpus they had for their account came and went because they didn’t measure twice and cut once. So yes, I think there are probably several factors that might be number one in terms of rules for success in trading, but I think the one that comes down, two affecting everybody, people who have a billion in assets to someone who’s got $10K trying to figure it out, it’s to keep your losses small because when you do that, you can dig out of your drawdown faster. And two, the losses are so insubstantial, unsubstantial that you don’t freak yourself out emotionally and you have to manage both your emotional drawdown as well as your financial drawdown. Remember, again, at the beginning, don’t tell me stuff I already know. You’re risking one 10th of 1%. I understand that there’s not a lot of money to be made, but at the beginning you’re not doing it. You’re doing it to test the waters. You as a tryout, you’re trying to make the team so that you can determine what’s best for you. The p and l is incidental. What you’re trying to do is find a way to behave consistently so that over a longer period of time, hundreds of trades, you can see that you have a certain type of an edge.
You have positive expected value when you do a certain set of rules or take a certain amount of steps in conjunction with one another, and that leads to net of all your losers more money than you had when you started. That’s your trading edge. Once you’ve isolated that, then by all means you can scale and get back or go to a point once and for all where you’re at the threshold of your tolerance for risk at the beginning. You don’t have to worry about making or losing money. And as much as that, you’re trying to get the data to find out what works for you. What can you do all the time? One thing, don’t worry about, I have my opening range trade, then I have my lunch hour trade, and then I have my closing range trade. It’s too much to try to get good at, and you could be discouraged. And again, going back to yesterday, you want the mental edge focus. Focus on one thing and just realize like it’s going to take time. You’re not going to get there tomorrow. I wish you could, but I do these videos to help you understand the mental game of it.