Mike’s note: In Larry’s view, there’s one specific concept that can completely transform a struggling trader into a successful one.
It’s simple, but can be difficult to implement. And it makes a lot of people give up – separating the wheat from the chaff.
That’s because this idea is the key to long-term sustainability in the trading world. (And most traders, especially new ones, focus only on the short term.)
Read on to learn what it is… and why, of all Larry’s trading mantras, this is the most important to remember.
And if you haven’t yet – be sure to sign up for Larry’s free Trade-a-Thon this Wednesday night… and watch the latest in Larry’s documentary series while it’s still available.
The Only Good Risk Is Earned Risk
By Larry Benedict
The biggest, most important concept in trading is something that’s totally lost on most new traders.
It’s simple. But it’s directly at odds with the “fast cash” mindset that gets most people interested in trading to begin with.
You have to “earn your risk.”
Let me explain…
When folks are new to trading, they tend to look for ludicrous returns right out of the gate. They speculate on long-shot bets and blow away all their starting capital. (I did the same. More on that later…)
I’m not saying there’s no room for those long-shot bets. They can be lucrative, if you have the right plan.
But they have to be earned.
You should only look to place these riskier bets after you’ve captured profits from a number of smaller ones.
You need to grow your capital pile with low-risk trades before you shoot for the moon. That way, you’re protected if the risky trade goes bust… And you’re still around to trade the next day.
That’s what keeps you sustainable.
What tends to happen is a trader will go on a losing streak… get frustrated and emotional… and just wind up losing more, even faster, because they aren’t looking to capture small profits to recover their losses.
I’ve seen it happen with plenty of new traders, all throughout my career. And it’s one of the key things that drives them out of business.
Only once you’ve built up a strong foundation have you earned the ability to take on more risk. And if you’re on a losing streak, you’ve lost the ability to play with risk.
It’s really that simple.
It Happened to Me, Too
I made my big mistakes early on in my career… And it cost me all of my money several times over.
It really came down to a bunch of silly mistakes. One of them was position sizing. I would bet way too much on one risky trade and wipe myself out. After a few times of doing that, I began trading smaller lots.
But once I got further into my career and had a solid foundation of capital, I began to take on larger position sizes. At first, I was only able to handle 10 shares of stock. Then 100… 1,000… then 10,000.
Soon I was making trades on hundreds of thousands of shares at a time. Then, when I was running my hedge fund, I was trading position sizes in the millions.
That’s because I earned my risk. The lots I was trading grew along with my pile of capital.
You see, I never looked at any position differently. It was the same mentality, no matter the size of the position. I built up my capital base bigger and bigger, and slowly earned the ability to trade more substantial sums.
And that grew my capital pile exponentially…
Here’s an example: One of the larger positions I’ve taken in my career was in Bank of America, in early 2009. This was back when Bank of America was going bankrupt. We were dealing with the financial crisis.
So, I saw an amazing opportunity. I bought $108 million worth of Bank of America in one shot. I went in and got 27 million shares at $4 each – close to the bottom.
I made somewhere between $3 million and $5 million on that trade.
That sounds like a massive return… But it’s actually just about a 4-6% move.
In other words, I took a gain that, in percentage terms, most traders would consider small… but was worth millions.
To build your capital pile, those are precisely the gains you should be looking for on each and every trade. If you’re able to make 3% or 5% several times a week, your trading account will start growing exponentially.
That’s why I don’t get nervous about position sizes. Every position size is basically the same to me. It’s how I’ve done as well as I have.
Bank of America was an outlier, of course. It was a massive position for me. But it was a once-in-a-lifetime opportunity. There was a global financial crisis happening, and I saw the perfect opportunity to trade it.
But I had EARNED that risky trade by slowly building up my capital pile into the hundreds of millions.
Even by starting with just a $100 trading account, you can do the same. It’s all about playing it safe until you earn your risk… and then making that life-changing home run.
P.S. After 35 years quietly trading for hedge funds, I’m coming forward now because I believe anyone can use what I’ve learned to become a trading success.
Because it doesn’t matter if you’re wealthy or not-yet-wealthy… young or old… a Wall Street vet or a complete novice. Using these principles is what generates success.
In my exclusive tell-all presentation on Wednesday night (sign up for free here), I’ll walk you through how each of these principles contributed to my success – leading me from the bottom rung of Wall Street to managing hundreds of millions of dollars.
When you attend, I’ll even supply a copy of my Foolproof 50 – my personal list of the 50 best securities to trade in the market – to help get you started. Secure your spot right here.
In Case You Missed It…
If you’re getting excited for the upcoming Trade-a-Thon on Wednesday, December 11th…
Then you’ll love today’s special giveaway.
In short, we’re sharing something that could help you make a LOT more money in the coming months. And it involves someone very, very famous (whose name you’d almost certainly recognize).
I won’t say any more here.