A Common Misconception

We’ve all heard it before: You just need more winning trades than losing trades in order to be profitable….


There’s a common misconception out there that more winners than losers automatically results in a profitable account. I personally don’t think that’s the case at all. In fact, the more important thing to worry about is how big those losers are relative to your winners. You can have more winners than losers but have your losers result in massive drawdowns that your winners can’t make up for. I can’t begin to tell you how many horror stories I’ve heard about just 1 or 2 trades completely ruining a portfolio filled with all these other winners. So to me, I believe that as long as you keep your losers small, you can have plenty of them and still keep an extremely profitable account.

And this really just plays into the importance of risk management. I know I harp on this a lot, but it’s so true. The only thing that matters is managing your risk. I don’t care how you come to your conclusions. It’s irrelevant. And I get nasty emails sometimes from people disagreeing with my methodology. But the truth is, who cares how we come to our conclusions? Balance sheets, income statements or lunar cycles – it doesn’t matter to me. I just want to know where we’re wrong. At what price is the original thesis incorrect? And therefore, how much are we risking to put on this position?

I don’t even care how high you think it goes – I just want to know what the out is so I can see if that amount of time and risk meets my personal goals and objectives. Tesla is a good example. Sure for a while I’ve been saying that it probably goes higher. The trend is your friend right? But there was always way too much risk in it for me to participate on the long side. My outs were never well-defined. So sure I may have been right, but you know how much money I made from it? Zero. And that’s all that matters. But guess what – I didn’t lose anything in it either. And that’s my point.

Run the numbers in your portfolio and see how many trades are losers relative to the winners. Are you still up? How much bigger are your winning trades than your losing trades? How much longer did you hold winners over losers? Or did you unfortunately keep your losers longer than your winners? All of these are concepts are important to keep in mind.

Because, “It’s not about being right, it’s about making money”.