Hello Maverick. This is Robb Reinhold and welcome to High Percentage Trading. I absolutely love to do sessions like this. And the reason why is because everyone wanting to get into trading, you know, we’re excited to get into the charts, excited to get into the option strategies and we’re excited to go out and make some money. I get it because that’s how I was.
And basically, we jump over a lot of the basics and the concepts and the theory, and we get right into the minutia. A lot of times when we jump over some of the basics or some of the theory, we make some mistakes as traders and as human beings. And this is just not in trading but it’s like in anything. I am your typical male. When my wife buys something that requires assembly, what do I do? I put it together. And then what do I do in the end when it screws up? I go back and read the directions and then fix my mistake and I turn what could have been a 30 minute project and do a two hour project.
I feel like a lot of us do that same thing with trading. So I love these sessions here because we’re not going to get into any details, any minutia. And for my real far left brainers, anyone who is an engineer type person, this kind of session typically bores them because they say, I want the stuff. But it’s the same thing, if you’re an engineer, and you want to learn how to make electricity work in the building, yeah, you want to dive into all the details, but you really need to understand the big picture. So this is a big picture session. This is all about what are we really trying to do when it comes to trading.
So we’re going to talk about high percentage trading and we’re going to talk about what exactly that means. We’re going to talk about how you can put that into your trading plan. And basically we’re going to talk about how to execute that because in the end we want your trading to be profitable.
There are 100, 200, 500 different ways to be profitable as a trader, but they all follow the same system and the same path. Again, I don’t care if you use Fibonacci, I don’t care if you use Elliott Wave Theory, I don’t care if you use no indicators. None of that matters if you don’t understand the concepts we’re going to be going over right here.
So again, a lot of us, we jumped right into trading. I know I did it, I jumped into trading. I’d read a couple books, I click some buttons. And again, I didn’t even know what I didn’t know. And so, these are the common mistakes that most people take into trading. You’re going to jump in, they don’t have a very comprehensive plan. Again, it’s one the very first things we stress here at Maverick is that you have to have a trading plan. Enter your trading plan without understanding your risk.
I remember the first time I made trades, I didn’t really understand about gaps. I didn’t really understand about stop orders. One of the things that, and I’m sure any of you who are actively trading at the moment, all the brokerages have been very, very diligent on sending out messages about stop orders. And basically, the stop orders say hey, look, if you use a stop order, that doesn’t guarantee anything, it does not guarantee that you’re only going to get out with a small loss. It doesn’t guarantee anything because what’s happened is that people who don’t really know what they’re doing, they’ve said, oh, all I have to do is put in a stop order. They put a stop order of 50, the stock gap’s down to 35, they get filled at 35 and they don’t understand what happened.
So again, part of the trading plan is understanding your risk, understanding exactly what you have at risk and understand is this acceptable. And again, everything else is about emotions. Breaking the rules of your plan because again, doesn’t matter what it is. Inability to act, react and adjust. This is again, it’s like deer caught in headlights. I’ve been in a trade where I really was frozen, and that’s what I call it, and I write emails all the time to our traders, says hey, it looks like you’re frozen. Looks like you’re frozen on this trade. It looks like you’re not able to do the right thing. Let us go ahead and do it for you.
And of course, they will say, no, no, no, no, I got it. The we have a talk and we say, okay, no, look, this is already gone past where you want it to go. Let’s just liquidate it. You can always get back in. And that’s what people don’t realize, you can just always get back in
All right, falling in love with currency. As you can see, all this stuff is really about emotions. All of the rest of this stuff is about emotions and what it caused you to do. Without a trading plan, you’re basically only going to be trading with emotion.
Now, when we jump into this, this is really where I want to start and I want to start off with a personal story of mine. I remember my very first trade I ever made, it was a stock trade and it was on a company called Ciena. Ciena is actually still around. This was all the way back in 1997 when Ciena was a startup fiber optics company. And I remember watching the stock and it kind of, I’d watched it move up and down and then I thought, okay, I think I’m going to buy it here. And I clicked the buy button, and once I clicked the buy button, I realized I have no idea where to get out. I have no idea. And I hadn’t planned it out, I just thought I’ll just get out when it’s a good time, which I didn’t really even know what that meant.
And sure enough, over the next couple hours, it went up a little bit and I had a profit and went down a little bit and I had a loss. It went up I had a profit, went down, had a loss. Couple of hours later I couldn’t take it anymore and I sold it. I think I made a $17 gain. But before anyone applauds, back then commissions were about $25 a round trip. So I actually lost a total of eight bucks for commissions.
And I remember I was exhausted, I was exhausted. And I realized, okay, I didn’t really know what was going to go on. Over the next couple months and maybe next year or two, I studied a lot, I practiced a lot, I read a lot, and I started to get pretty confident about my charting and about my trading abilities. And I started to be convinced that I knew what was going to happen. I actually became a worse trader for a while because of this, because I was positive I knew what was going to happen because the charts said X.
Now, the ironic thing about that time in my life is that if you were to ask me the question, Robb, do you think that you can win on every single trade you make? I would have laughed and said, of course not, that’s ridiculous. No one is going to win on every trade to make. And then if you ask me, well, do you think you’re going to make money on the trade you’re in right now? I would have been like, oh yeah, for sure, for sure. This is a for sure winner. I’ve got a great chart pattern and I’ve got this. Does everyone see how ridiculous that is? Oh, for sure this one, for sure I know what’s going to happen on this one, but of course you can’t win all of them, but this one for sure.
And it caused me to make mistakes in my position management because again, I was sure of something happening. Luckily, that overconfidence didn’t last very long because the market slapped me down a couple times and I realized we don’t know. And so, I really wanted to tell that story because I still get some of our traders saying, Robb, oh, this one’s got a great chart pattern, I know it’s going to go to 70. And when I hear one of my traders say I know something’s going to happen, I always say you don’t know bleep. And again, I say it, I won’t say it here, but I would say, no, you don’t. You don’t know. You don’t blank. You don’t know. You think it might happen, your analysis says might happen but anything can happen.
Again, the problem of lot of traders, especially my left brainers, my left brain engineer analytical types, in their mind, if you do all the steps correctly, you always get the right result. Let’s go back to electricity. If you put all of the circuits incorrectly and you flip the switch, the light bulb always turns on. And if the light bulb doesn’t turn on, it means that there’s a problem in the process. And once you fix it, the light bulb will always turn on.
My engineer types, they go into the market with that attitude and they get killed because that’s not how the market works. We need to understand that there is no guarantee on any one trade. And that we all know that we will never be right on every trade. However, we need to totally know that and totally accept it. As I told the story, I theoretically would have told you of course we can’t make money on every trade, but I thought every trade I made I was going to make money because I did all the research and I only made the good ones.
So, this prediction trap, please, from this point forward, if you have already not done this, from this point forward, never say that you know something is going to happen. I promise you it’ll only gets you in trouble as a trader. It’s all about odds.
Now, if you want to say to me, Robb, it’s got this chart pattern, which means most of the time it’s going to do this, hey, oh, great. Great, that’s the right wording, that’s the right wording, which means by default, sometimes it doesn’t do that and we have to plan out that it’s not going to do it. So, everyone needs to get into the mindset where, okay, we’re going to make a lot of trades, we’re going to be right on some, wrong on some, what’s the net result.
I’m going to give what I call my 10 Trade Analogy. And I really wish someone would have sat me down and beat this through my head. Now, you’re going to make, let’s just say over the next whatever it is, couple weeks, couple months, whatever it is, you make 10 trades. Now, every one of these 10 trades, you did your research, you looked at the chart, you planned it out, you waited, you were patient, and you made 10 trades.
Now remember, the only reason you’ll ever make a trade is because you think it’s a good trade. You won’t make a trade that you think is a bad trade. So by default, out of these 10 trades, you will be convinced that all of them are good trades. That’s how it works. All of them are great. All of them have perfect setups, all of them have perfect whatever it is. Out of these 10 trades, I hate to break it to you, but somewhere between three and five are going to be losers.
Now look, you did it all right. You looked at the charts, you waited, you did everything and frankly, three out of five, you’ve just lost. And again, there’s going to be probably just say three to four that are okay. I mean, okay, they went for you. You were right, they went your direction. They didn’t take off but they were okay. And then you’re going to get one or two that are great. You’re going to get one or two that are absolutely great.
All right. Now think about this. All 10 of these trades you thought were great. Let’s just say four or five of them were losers. And then four or five of them were okay. So let’s just say, let’s just put numbers on them. You had four losses, four okay, and you had two great ones.
This is the distribution. This is what trading is. This is it. This is a 60% win loss ratio. That’s kind of what we’re shooting for. But no matter how well you did it, you still had three to five that were just no good, and you did everything perfect, just no good.
Now, I want to put some numbers on this and I’m just going to use a stock trade here just for the ease of it all here. So, let’s say that you, all these stocks you entered at $50 a share. $50 a share and you had a stop at let’s just say 48 bucks. So let’s say these were all of these trades, all of these trades were $50 a share with the $2 stop. Now, here, what it means, you had four losses so you had minus $8. All right, and let’s say your okay ones, let’s say your okay ones went up to let’s say 52. And so let’s say that your okay ones were a $2 gain. So that’s equal to eight bucks. And again, we’ll say great ones went all the way up to 55, went up 10%.
Hopefully everybody can see here that without these two great ones, you were basically breakeven. Let me show you how the numbers can change all this because this 10 trade analogy, I don’t care, again, I’ don’t care if you Elliot Wave Theory, I don’t care what you’re using, you’re going to have some winners, some losers. You’re going to have some that are good, some that are sort of bad. You’re going to have some that are great and you’re going to have some that are terrible. Let’s see the margin of error here that if you really blow this.
So let’s say that we have two great ones and we actually have two terrible ones. So out of our four losses, we had two minor losses and two terrible losses. And let’s say you blew the position management, let’s say you didn’t get out with the 48 stop and then went down to 45. So you took $5 losses on these. You took a $2 loss on two of them. And then again $2 loss on, $2 gain on these. But let’s say that you exited your great ones too early. So let’s say you held your losers and cut your winners, which is what most people do. And these great ones only turned into $2 gains. Does everyone see what just happened?
This ended up with a minus $2. It was the same, again, we’re talking about a 60/40. This is 60/40 over here, this is a 60/40 over here. This person took a winning result over here where it won 10 bucks and turned it into a $2 loss. What was the difference? There was no difference in one loss. The difference was in the position management. I’ve been trading now for 22 years and I am 100% convinced that the way you win this game is by the position management. When you get into something is not nearly as important as how you manage that trade and how you get out of it.
So, I hope everyone grabs this 10 trade analogy. And the biggest thing I want you to take away is you’re going to have wins and you’re going to have losses. All that matters is what is your net result. What is your net result? How you manage the trade is going to be your net result. So let’s take that mentality and let’s really start to apply it into our trading.
All right, so again, we’re going to make a combination of trades. We’re going to make, let’s say 100 trades a year. I want to say last year I think on our trade alerts, I want to say we made like, I think it was like 170 trades a year, and our win loss was just under 60%, reward to risk ratio was 1.6 to 1. So, we need to go into trading with that same idea. Okay, we are going to be in the market and we’re going to be trading the entire year. And throughout the year, there’s going to be times that the markets are bullish, times that the market is sideways, times where it’s bearish. We’re going to be placing trades during that year and we want to only put the money to work in the market when the number of factors suggest a meaningful move in one direction is great enough to justify the acceptance of risk.
Let’s kind of go through that. One of the things we’d like to say at Maverick is cash is a position. There are times where like right now, right now the market is in a slow creep higher. That to me is my least favorite market condition. So guess what, I’m in more cash than I usually am. Why? Because I do not believe that the number of factors suggesting if we’re moving one direction is great enough for me to justify the risk of putting my capital out there. So again, I will be patient because I know that throughout the entire year the market’s going to change and there’s going to be a change in the market that is very conducive to the way I trade. And when that happens, I want to have more money in the market, I want to be making more trades.
So in the end, throughout the entire year, you’re very, very patient, you’re very, very deliberate, and you’re making your trades based on your trading plan, and you’re waiting for the trade to set up correctly. And what you’re going to do is you’re going to make trade after trade after trade after trade. There’s going to be some winners, there’s going to be some losers, there’s going to be some break evens. But in the end, you’re going to get a distribution of your trades.
All right, now, this is just basically the bell curve. And my guess is, actually not my guess, just how it works. If you make enough trades, your results will resemble the bell curve, where again, most of your trades you make are going to be small winners, small losers. Again, we call these singles, I call the singles, a baseball analogy. And then you’re going to get some doubles, you’re going to get some doubles, okay, this one actually did pretty well. And then you’re going to get some home runs and you’re going to get some disasters. Over all your trades, this is going to be your distribution.
Now look, everyone thinks, no, no, I can change that, I can only have winners. And then what they do is, let me give you one example. So, in options trading, there’s a strategy called a condor. Now a condor is a sideways strategy. And people say, okay, well, I’m going to do a condor where the market I’m guaranteed a profit as long as the market doesn’t move more than 5%. And they look at their statistical probabilities, and guess what, their statistical probabilities are 97% win. However, here’s the problem, when they win, they win 10 cents. When they lose, they lose $4.90. They’re still going to have a distribution, but what they’re going to get, they’re going to get a whole bunch of little wins and they’re going to get a few horrendous losses. And again, they won’t be profitable. And they thought they’d be profitable because, hey, I got a high win loss.
So, really, we’re going to talk about these statistics and we’re going to talk about getting your numbers, playing the numbers, what numbers you want to shoot for. But in the end, we’re going to get this sort of distribution. Again, I’m showing you all this because I remember as a young trader, I remember thinking every single trade I wanted to win and I know that sounds silly because I still want to win every trade. That being said, I have no preconceived notion on any trade anymore that is going to be a winner. I have no idea.
And frankly, I don’t even care because I know that if I play my numbers and I make enough trades, I know I’ll have a profit. That is when trading gets to the point where you’re a professional, where it’s no longer about any one individual trades. It’s about your system. It’s about your consistency. When we all start out trading, it’s all about the singular traits. It’s all about, oh my gosh, I need to get one trade and it will change my life. If I could just hit one home run, we all start like that. But true trading is, it’s your system, it’s your system. Stick with your system, build your system and then trade your system.
Now, if you take a look at this statistical distribution, the real way to win this game is to cut off this. So again, if you can really eliminate your big losses and you can hold some of your big gains, you by default, again, if there’s a trader out there that’s just 50/50 or heck, you know what, they could be less than 50/50. I have traders that have a negative win loss ratio but they make a ton of money because their winners are much bigger than their losers and they do a very good job of controlling the downside risk.
So, everything that you’re doing in your trading plan and everything you’re doing in your trading should be to get these positive numbers or positive results. And these numbers are made up of two things. Your win loss percentage and your reward to risk ratio.
All right now, I’m going to give a baseball analogy and I feel like in full disclosure I need to say that I’m not a baseball fan at all. I will watch a World Series game seven if it’s close in the last couple innings. Okay, I’ll tune in, I’ll tune in, but I just cannot, I cannot watch a baseball game in May. I just can’t do it. But baseball is by far the best analogy for trading because as a baseball player, you’re going to get up to bat. Again, if you play every single game, you’re going to have about 550 at bats in a year. Think about that. 550 at bats. A good baseball player has a 300 batting average. I shouldn’t say good, that’s actually pretty great. If you have a career 300 batting average or higher, you probably make it into the Hall of Fame.
So that means that 30% of their at bats end up with them getting on base. So that means that 70% of the time that there is a failure. Think about that. As a batter, you go up, you have an at bat and you’re either going to get a hit, you’re going to get a single, a double, you’re going to strike out, you’re going to fly out. Something’s going to happen. A good player will get hit 30% of the time. That means there’s a whole lot of failure in baseball.
Next is your reward to risk ratio. This is what’s called your slugging percentage. Now, I don’t know what a good, I do know what a good slugging percentage is in baseball. It’s about 300 to 400. Slugging percentage is when you hit it, how hard do you hit it. So, a player that has more home runs, more doubles and triples, they will have a higher slugging percentage. A player that gets a whole lot of singles, they’ll have a lower slugging percentage.
So if you take a look at it, this is a great example of trading. Your win loss percentage is how many times do you get hit, how many times do you get a win. Your slugging percentage is, when you get a win, how big was it. These are the two numbers and really the only two numbers that you should care about as a trader is your win percentage and your risk reward ratio. You need to know these numbers. And if you cannot get a positive return off of these numbers, then you are not a profitable trader.
And so, I always tell people, look, until you can do this on a consistent basis in a demo account and on a simulator account, you probably shouldn’t be trading live because the results are only going to be more difficult once you throw the emotions of it into it. So in the beginning, this is all you should be, all you should be concerned with is win loss percentage and reward to risk ratio.
All right, now let’s go through some goals. Now, I’m just going to throw out numbers here. I’m going to throw out numbers of directional traders. Let me quickly go through exactly what that means. A directional trader is a trader that is looking to make money on a movement of the price. Now, I know that seems a little silly for anyone who isn’t well versed in options because the average person on the street only knows directional trading. They only know, oh, if I buy a stock at 50, it has to go up for me to make money and if it goes down, I lose money. Like everyone understands that.
This is what I call directional trading, means you need to call the correct direction. Now, with options trading, we can do a non-directional trade, we can do a bi-directional trade. We can make a trade where we don’t want it to go anywhere. We only want it to go sideways. Let’s forget about that and let’s just purely talk about directional trading. I’m talking about this because when you work on your trade simulator and you do trades on the trade simulator, this is what you’re going to be doing is directional trading. You’re going to be looking at a chart and trying to call the direction of the stock over the timeframe that you’re looking at.
So, obviously, you want to have a good win loss ratio and a good reward to risk number. Now, again, I’m throwing these numbers out. As I said earlier, we have traders at Maverick that have a 30 to 40% win loss ratio but their slugging percentage, their risk reward is so great that they’re profitable. But when you’re working on the simulator and when you’re working on just getting to where you feel comfortable, I feel like you want to get to a point where your wins are more common than your losses. So you want a positive win loss. So again, 55 to 70%. I think 70% is really, really optimistic. I would really like to see you shoot for 55%. But even more important, this is really what you want to shoot for.
Now, it’s very common in charting and people looking at charts and we’ve been talking about looking for your risk reward ratio on a trade. If you have a stock at 50, you say, okay, I’m going to get out if it goes to 48 and I’m going to get out if it goes up to 54. Again, that means you’ve got a $4 upside potential, $2 downside move. This is a two to one risk to reward ratio. Now, again, this is all theoretical. This is before you make the trade.
The risk reward number I’m talking about is after you’ve made 10, 15, 20, 30 trades, what was your risk reward number, what was your actual risk reward? Was the actual profit that you generated compared to your losses. Great thing is your trading journal will calculate these numbers for you. So again, if you just follow the system, go through the simulator, make simulator trades, put in the numbers, the journal keeps track of all this for you, it tells you what’s your win loss percentage, it tells you what is your reward to risk ratio as well.
Again, in directional trading, we love to see you get to the point where you’re right slightly more than your own. But even more important, we want you to get to the point when you’re right you’re holding your winners and when you’re wrong, you’re cutting your losers. That is the goal in charting, to get to the point where you can do that every single time.
Now every so often, I still sit down and I look at and I jump on a simulator. I love the trade simulators that are out there. I wish, oh boy, I wish that I had trade simulators when I first started. For me to pay per trade or to simulator trade, I had to print out a chart and cover it with a piece of black paper. And I would slide the paper one candle and then I’d write down, okay, this is what I’d do here. And I’d moved it, and I’d write down and move it. I spent a lot of money on paper and toner just to get maybe 50 charts worth of experience. With the online trade simulators, you can do 50 charts in an hour, you can do 50 charts very, very quickly.
So, it’s very easy and very doable here to get on those simulators and get to the point where you’ve got the numbers you want.
So number one, proper trading attitude. Now what I mean by this is exactly what I’ve been talking about on the session. You are not going in there thinking you’re going to win every trade. You know that you’re going to have losses. Your job is, out of those 10 trades, remember my 10 trade analogy, remember, you’re only making them because you think they’re great. But when you click that button, you have no idea whether it’s two of the really crappy ones, where there’s two of the bad ones, where there’s two of the break evens, where there’s two of the okay ones, where there’s two of the great ones. Now you have no idea.
Now remember, ironically, you made the trade because you think they’re all going to be the great ones. But in reality, they’re not. There’s only going to be one or two in there that are really fantastic. So what you have to do is you have to treat them all like they’re either the great ones or all like they’re either, they’re the bad ones. Remember, you don’t know which one they are. You did the research, you think they’re great but they could be terrible. So you have to manage them all the same. And if you manage them all the same and you cut losers and hold the winners, you’re going to end up with a really good reward to risk ratio.
So again, this is all about trade management. And as I said earlier, most people when they get into trading, they think it’s all about the chart setup. Oh, I’ve got a chart setup, I got a cup and handle pattern, I’ve got this, I’ve got this. Guess what, that doesn’t really matter. I have all the time and traders tell me, hey Robb, this is why I got into this trade. I said, I don’t care why you got into this trade, that’s totally meaningless to me. What is meaningful to me is what’s your trade management plan. What are you going to do? How are you going to handle the losers, how are you going to handle the winners and can you do it over and over and over again.
So again, when you get on the simulator, very important to have a really good trade management is this is where you’re going to see profits. And if you blow it, this is where you’re going to see losses. So focus on of course, you have to focus on the correct entry points but you also must focus on the correct trade management. Stick with the plan.
Now, one of the great things I love about the trade simulator is it allows you to do A/B testing very, very quickly. A/B testing is where you say which one is better. And I have traders tell me all the time, hey Robb, what’s better? Is it better if I get in on the breakout? So again, let’s say there’s a, this is a very typical question I get. So let’s say there’s a stock that is basing and then it breaks out but it’s in the middle of the day and they say, should I get out on the breakout or should I wait until there’s a full candle above the breakout? I get that question all the time.
Now, me personally, I get in on the breakout. However, Joe Jensen who’s been trading next to me for 20 years now, he waits until the candle closes and he gets in the next day. Which one’s better? Guess what? Sometimes my trades are better, sometimes his are better. Sometimes he doesn’t even get into the crappy trays that I got in because it breaks out and fails that day and he just kind of laughs at me. In the end, we’re both profitable is because we stick with the plan. So if you ever have a question of, oh my gosh, I don’t know which one’s better, this is a great time to test it. Use your simulator and say, okay, let me do 20 trades with Plan A, let me do 20 trades with Plan B, which one develop better results and frankly, and more importantly, which one was more comfortable that I could follow all the time.
All your position management should be based on one thing, cutting losers and holding winners. Now again, out of those 10 trades, we have to let them show us whether they’re winners or losers. Now one of my favorite sayings that I love to share with our traders is the best way to know if you’re in a winning trade is if the trade is winning. Now I know that sounds dumb. I know it’s like of course. But I’m telling you, you do all this work on a chart, you buy it at 50. And if it actually starts to go up to 50/50, you know that at least short term, you got it right.
Now, I can’t tell you, a lot of people tell me, many times you buy the stock at 50 and then it just goes down immediately. That’s a great sign that you’re in a bad one. Now yes, sometimes they turn around but the best sign to tell if you’re in a winning trade or not is just look at your P&L. If it’s been two days and your P&L is negative, I’m going to go ahead and say that one’s probably going to get knocked out for a loss. Of course, they do recover sometimes.
But if you’ve got a trade that two days later is in a positive P&L, hey, good job, great job. That is exactly what you want to do, so you want to hold those as long as you can. I guess they will reverse, and again, we’ll talk about how to put in trailing stops, had to grab at least some of those profits if they do reverse. But some of them are going to take off. Let those run.
So, in your charting, this is what it’s all about, proper position management, risk management. Again, you’re not going to be really working with position sizing in the simulator. We just want you to work on getting those numbers. But in further sessions we’ll be talking about position sizing, making sure it’s correct.
All right, so risk management. Risk management is basically don’t take the big loss. I wish we could just cancel at risk management and just put in don’t take the big loss. We know that losses are going to be part of the business. So risk management isn’t eliminating losses, it’s about making losses acceptable. We know they’re going to happen. We know that we’re going to be wrong on some trades so we need to make those losses acceptable?
Now, we talk about a couple things in future sessions where we talk about position sizing, and we get into statistical odds of streaks. So here is a fun little one. If you are a 50/50 trader, meaning if you’ve got, 50% of your trades are win, 50% your trades are losses, the statistical probability that you’re going to have a seven loss streak in the next 50 trades was 31%. Think about that. That’s really high. So if you’re a 50/50 trader, and again, and this will work with flipping a coin. If you’re flipping a coin 50 times, there’s a 31% chance you’re going to have a seven loss streak in there.
So what we really need to do is we need to think about those things that okay, well, what about when we are out there trading, what about when we do get this loss streak? Now again, it will happen. Statistics say this will happen. And so you need to look at your trading plan and say, okay, what is going to happen to my capital if I do take seven losses in a row? Now, if you are risking 10% of your account per trade, you’re going to have a 70% drawdown at some point in the next year that you can’t come back from that, you can’t come back from it.
So you really have to think about risk management. About okay, how much capital do I put in one position, how much of a loss am I willing to accept and then what about when I do have a seven or eight or nine losing streak loss? How much is that going to cut into my trading capital. And you need to start to think about trading in those terms.
Now, hopefully, you can see how much deeper of a level this is of trading because in all the trading books it tells you go out, read a good chart, press the buy button, put in a stop, do this, whatever it is. They never talk about the statistics of losing streaks. You will have an eight losing streak run, you will. You’ll have a 10 at some point in your career. At some point in your career you’ll have a 15 one. What are you going to do to weather that storm? And again, position sizing is how you do it, position sizing is how you whether that storm.
So, I want everyone to just be thinking about trading and I hope that during this session, as most people get into trading, they think it’s about reading a chart, clicking button, making some money. That is the least important part of trading. The most important part of trading is okay, building a system that has an edge, trading that system, following it, being consistent. And then last is weathering downturns. How do you weather drawdowns? Have you built something, because even a great system, even a great system is going to have a point in the career of it where it creates a bad losing streak. How are you going to weather that?
And again, the only way to whether that is through position sizing and also through, I call it money management. One of my strategies that I use is that, when I have a winning streak, I take out a distribution because I’m statistically more likely to go into a losing streak after a long winning streak. So by taking a big distribution, I’m automatically reducing my position size. That right there will help out.
Now I detail that in a later session called money management. It is in advanced concepts and we talk about how to basically do money management through just taking distributions. And taking money out of your account and then adding money back into your account at certain times can also, again, if you are 50/50 in a one to one reward to risk ratio but you take distributions at the right time, you can be a profitable trader. It’s actually really cool. It’s a really cool strategy that I talk about later. But, I don’t want to get into that now, let’s just get into preparing you for your charting and your trading.
So in the end, have the right perspective. Don’t try to win every single trade. That’s not the goal. If you go out there with the goal to win the next trade that you’re going to make, I promise you it’s going to cause you some psychological problems that will cause you to make mistakes. If you go out there saying I’m going to make 20 perfect trades and I’m going to plan out each trade, I’m going to plan out my win loss, I’m going to plan out this and I’m going to make 20. And out of those 20, I’m going to hopefully make money.
If that is how you’re tackling trading, you’re going to do fantastic because what’s going to happen is you’re not going to fall into a lot of the psychological traps that the other traders will fall into. Treat this as a business. Know your numbers. So again, we’re going to provide you all the tools to go out, make some practice trades, make some demo trades. When you get to the next section, you’re going to know your numbers.
So I always had people asking me the question, Robb, how much money am I going to make in trading? And I say, look, if you have your numbers, I could actually just do some reverse mathematics and tell you, with a $50,000 account, this is going to be your profit for the year. If you don’t have those numbers, I have no idea, I have no idea. So any business, they know their numbers, they know things like how much does it cost for them to acquire a new customer. They know how much it costs to provide their service. They know all their numbers. So just like a successful business, you need to know your numbers and trading as well.
Last thing, do not focus on the money. I really wish that I could completely remove the profit and loss column from all of your trading platforms. Imagine that you could not see how much money you had made or lost. Imagine that. Imagine that there were no numbers on your trading system and all you could do is just, all you could see with your win loss and risk reward percentage. Do you think you’d trade differently? Just think about that. If you couldn’t see your reward risk ratio, let’s say you just had to trade for the whole year and you never saw your account balance, do you think you would trade better? My answer’s yeah. I think you would trade better because it would stop being about the money and it would just start being about the numbers, about the game of the numbers.
Did you get a positive win loss and a positive reward risk ratio? And all of a sudden, if you focus on that, the money is a byproduct. If you focus on the money, then the money is very difficult to get in trading. So, focus on your plan, focus on your system. Use this opportunity to build your plan, build your system, test it out. The simulator is a great place to just test and test and test, get into the demo account and then trade in the real market with your system. The great thing is once you do that, it gives you a fantastic confidence as a trader. Once you know, I know that every single time I sit down on a simulator now, I know if you give me an hour, I can bust out a really nice profit. I know that.
And it’s really empowering because when you go out into the open market where there’s lots of challenges, that confidence is really nice to have with you and it’s really going to help you weather some of the storms.
All right, thank you so much for joining me. This is High Percentage Trading. Bye everyone.