But a smarter trader than me once said: “If you’re not willing to take a small loss, sooner or later you’ll suffer the Mother of all losses!”
In other words, all big losses start out as small losses. Kill them while they’re small.
The name of the game is avoiding the big losses. Big losses kill the math. Big losses make this game unwinnable. Avoiding these big losses is the first thing we need to work on. For some of us, this one thing is a major hurdle. But we have to clear it.
Next, we have to let our winners breathe. We have to be patient with them and let them run. Believe me, there’s no worse feeling than watching a big winner give back most (or all) of its gain (see my note about my $MJ trade last week). But it’s going to happen time and again. Being willing to see a profit evaporate is the only way we can stick with a position that has the potential to ride to monster gains. For me, this is the hardest thing. No question about it.
If we can succeed in holding our winners, the math works in our favor. Assuming we’re not suffering any big losses, we’ll find that 90-ish percent of our trades over the course of a year will be small winners and small losers, and they’ll effectively wash each other out. No net gain.
The remaining 10%?
That’s where the magic happens. This relative handful of trades will represent all our net profits for the year.
Do we have the stones to hold those winners?
This is what separates the hobbyists from the long-term profitable traders.