Why You Have to “Earn” Risk

Larry’s Note: Stocks are in “lunatic land,” ever-rising to new highs.

Meanwhile, the economy may be wrecked. We’ve got layoffs… tariffs… inflation… Middle East conflict… a national debt load nobody knows how to pay down… and so forth.

If you’re a buy-and-hold investor, you’re looking at a warning sign… A market this overstretched and precarious can’t hold itself up forever.

And when it snaps, it could take a chunk of your retirement with it.

That’s why on Thursday, May 7, at 8 p.m. ET, I’m doing a special strategy session… where I’ll show you how I’ve made millions through every market condition imaginable.

So far this year, my strategy has delivered 13 winners that returned more in a single day than the S&P typically returns in an entire year. Without overnight risk. And without worrying about which way the market is heading.

This strategy session is free for you to attend. Just click here to automatically reserve your seat.

The biggest, most important concept in trading is 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.)

I’m not saying there’s no room for 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 several 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, though, is a trader will go on a losing streak… get frustrated and emotional… and 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 throughout my career. And it’s one of the key factors that drives them out of business.

Only after 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.

Slowly Increase Your Positions

I made my big mistakes early on in my career… And it cost me all of my money several times over.

It 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 capital base, I began to take on larger position sizes.

At first, I was only able to handle 10 shares of stock. Then 100… 1,000… and 10,000.

Soon, my positions grew even larger. When I was running my hedge fund, I was trading millions of dollars at a time.

That’s because I earned my risk. The lots I was trading grew along with my pile of capital.

You see, these days, I never look at any position differently. I have 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…

Small Percentage, Large Gain

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 just about a 4-6% move.

In other words, I took a gain that, in percentage terms, most traders would consider small… but it was worth millions.

To build your capital pile, those are precisely the gains you should be looking for on each 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 and 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 only then making that life-changing home run.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict