The Difference Between Treading Water and Making Big Money

August 13, 2020

I shared this tweet today which was a quote from author James Clear of the awesome book Atomic Habits:

… and it dovetails nicely with a discussion I had with one of my All Star Options clients recently.

In conversation, it was asked of me what I plan to do about a few positions we’re in that are currently losing money?

The positions in question are all defined risk positions and so my answer was that until our stop loss levels are hit, there is really nothing for us to do. The trade setup is still valid.

The reason I’m able to come off nonchalant about this is because I’ve done the work up front to size each of my positions in such a way that if I were to take the maximum loss on these trades, the losses will be well within an acceptable range for my account.

The reason I do this is because I never know which trade is going to be THE HOMERUN TRADE. I never know. How could I? If I did, I’d invest all the capital I can get my hands on in my one best idea! I might have a hunch or a feeling that one trade offers higher potential than another. But there is no way to predict the future that I’m aware of. I go in hoping that EVERY trade will be a big winner. But I also know that it’s unlikely.

And because my individual positions are all right-sized (and in this case risk-defined), there is no need for me to agonize over each daily price swing, or worse — every tick.

This is a best practice that keeps me in the game and puts me in position to make a lot of trades, make thoughtful trades, making more consistent trades over time, making better trades over time, and get a few lucky trades that make all the difference between treading water and making big money.

I don’t know any other way to do it.

~ @chicagosean