Chris’ note: This is the final day to watch the special investing presentation featuring Legacy friend and “market wizard” Larry Benedict. So for today’s Daily Cut, we asked Larry to explain the No. 1 mistake he sees traders make.
And after you finish reading, click over and watch the replay of Larry’s presentation before it’s gone for good.
I’ve been a trader for 35 years. In that time, I’ve seen a lot of new traders get started, make some good money… then lose it all.
Usually, they make one or two great trades, ride the profits for a while… and then never do it again. After a year, they’ve usually gone bust and wind up quitting altogether.
It’s because of the No. 1 mistake I see traders make: swinging for the fences.
The one trait all the failed traders I’ve seen shared was a gambler’s mentality.
They swung for the fences on every trade – betting a large portion of their brokerage accounts with the hope of making outsized returns.
But that’s the exact opposite of what successful traders do.
Remember, in trading, it’s all about your P&L (profit and loss). You always want to put a “P” on the page – no matter how small or large.
You can’t rely on one or two home-run bets to trade successfully in the long term.
Although you may hit a home run once or twice… you’ll take a lot of losses in the process. And if you’re not padding your brokerage account with those smaller wins in between, you could wind up losing more than those home runs were worth.
So although it may feel like you’re making a bunch of money on one or two home-run trades a year…
When you factor in your losers, you’re making much LESS than you could be.
It all comes down to something I call the “time value of money”…
Economists point out that money in your pocket now is worth more than money in your pocket sometime down the road. That’s because (in normal times, at least) money earns interest. You can also put it to work in the markets and earn a return.
And the longer you have the money in your possession, the more time you can give it to grow.
My idea of the time value of money is different from how economists look at it – though they are somewhat related.
I think of it more as how much time and capital you’re willing to allocate toward making a certain profit on a trade. It all comes down to how long you can afford to sit in a trade to make it work.
So, let’s say you’ve made a 15% gain on a trade. Should you risk that solid gain for the potential of a home run?
A lot of folks on Wall Street will say you should. But I’m not like a lot of folks on Wall Street.
If you’ve “earned your risk” by building a solid pile of capital over a string of winning trading days, you may want to allocate more time and capital to that trade.
On the other hand, if you’ve been on a losing streak… and you have a dwindling capital pile… you should take the gain. Every win, no matter how small, builds your capital pile and enables you to eventually take on more risk.
Now, let’s say you’re down on a trade and hoping it turns around. Not by much, maybe 5% or 15%.
Again, if you’ve built up a decent cash pile, you can afford to wait for a turnaround. But if not, you should just take the small loss and move on to another trade that has greater profit potential.
The most valuable asset you have isn’t money – it’s time. And if you’re wasting time as your money wastes away alongside it, your overall profit potential diminishes.
That combination is one of the biggest things that takes new traders out of the game.
I go against the grain compared to most traders.
Most traders are looking to make 3,000% on that home-run trade. But that happens, what, every three years… maybe?
And if they’re up 60-70%, they aren’t taking that profit because it’s not 3,000%. To me, that’s just silly. If you have a 60% profit on a trade, take it! That position could easily turn into a loser… quickly.
As the days go by, and as you hold a position longer, you’re not only adding more risk to an already solid profit… you’re also keeping yourself from redeploying that profit into another opportunity.
The time value of money is all about considering the opportunities that you may miss.
It’s making sure a winner doesn’t turn into a loser… and preventing a loser from getting much worse.
I’m not solely focused on getting the home run. I want to capture gains when I have them.
That may not sound as exciting as hitting doubles and triples on every trade you make. But it’s realistic.
Between 2004 and 2012, I made $274 million at my hedge fund, Banyan Capital Management. And I was featured in the Wall Street classic Hedge Fund Market Wizards alongside the manager of the world’s biggest hedge fund, Ray Dalio.
And I’m here to tell you that if you follow my advice… and trade big only when you’ve earned your risk… you’ll get rich over time as a trader.
Home runs sound sexy. But they aren’t reliable or necessary to be a trading success.
The time value of money is the culmination of discipline and consistency. It’s strategic. You pick numbers you’re not going to go past on the upside and the downside. Then you execute – no matter what. You don’t let your emotions interfere with that plan.
With this strategy, you’re slowly pulling in profit after profit. That’s how you build your pile of capital… take on larger and riskier position sizes… and see exponential growth in your trading account.
And remember, the gains may not look huge on a percentage basis. But when you have a big enough cash pile, those small percentages can amount to millions of dollars.
It’s all about using the money you have to make more.
If you’re in a losing position right now and hoping for a turnaround, get out. Save that money for another opportunity. You’ll be glad you did…
Editor, The Opportunistic Trader
Chris’ note: During his special investing event last Wednesday, Larry generated $106,547… most of it in just a few hours. He did it using a technique he developed during 35 years of trading… And you can watch exactly how he did it in this replay of last week’s presentation.
But it’s online only until midnight tonight. So be sure to check it out here before he takes down.
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