Don’t focus on making money; focus on protecting what you have

  • You need to determine where you will get out before you get in. You need to specify your exit point when you get in. When you set an exit point, you need to know how much money you are willing to lose on this idea and also at what exit point you think you are wrong in your assessment. You should not place a stop too close, because that is likely to lead to multiple losses.
  • Some times, options can provide the same protection as stops.
  • At the portfolio level, it may also be prudent to specify a maximum loss from the starting stake for each year.
  • Be willing to get out quickly when you are wrong.
  • If you are not sure whether you are wrong or right and you have made a loss, partially liquidate 50%. If you continue to be wrong, liquidate 50% more. Then what is left is not a big deal.
  • When your losses are small, you will bet again. When your losses are big, you are afraid to bet and you lose great opportunities.
  • Never risk more than 1% of total equity on any trade is probably a effective money management tool for many.

Trading Wisdom – Larry Hite

Larry Hite – Turned a $2 million managed account into $800 million in 8 years.

Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you. If you argue with the market, you will lose. It is incredible how rich you can get by not being perfect. Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. I have two basic rules about winning in trading as well as in life:
  1. If you don’t bet, you can’t win. 
  2. If you lose all your chips, you can’t bet. Frankly, I don’t see markets. I see risks, rewards, and money.
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