If you make money every trade you will eventually be broke.

The benefit of being around the futures capital of world, Chicago, has been invaluable to me.  I have seen many people come and go and it has helped me to realize the mistakes a little faster.  It never prevented me from the mistakes but lessened their amplitude and frequency.

I use to ride the elevator with a guy who was a spread trader.  Through casual conversation we got to know each other more and it turned out we lived a few streets apart. His strategy was taking pennies, thousands of times a day.  He was really generous with his time and taught me a lot.  He was an old school guy and I liked hearing his stories.  He was not the typical trading personality.  He was as humble and as shy as they come.  The guy who was not trying to be the richest person in the world and did not see it only as a way of getting rich quickly. Through the course of our conversations I learned more about his strategy.  His strategy was a mechanical advantage.    He had been doing it for years and was good.  He made money almost every day.

As they say, it is all fun and games until someone gets hurts.  And like all trading, you do get hurt.  I have seen mechanical advantages taken away in a day.  Decimalization killed many stock traders and trading groups.  Some say it ruined the industry.  The second time I saw it taken away was when option groups were no longer given priority in order routing.  Again many options traders and trading groups died overnight.  Well if they died overnight it would have been a good thing, fact is they kept trading till it did not make financial sense or they busted out.  There are few bonds as tight as success and doing that thing that made you successful.  Changing at that point is extremely difficult.

So one day we are talking and he is acting strange.  I knew he had a bad day.  That invisible cloud that surrounds a trader after getting their bell rang was not so invisible.  One of the spreads he was trading blew up. He gave back a months worth of work.  The next week it was 3 months.  Two weeks after that it was a year of work.  Then I never saw him again. The idea that anything in trading is risk free is a crazy concept to me.  I respect all market participants, including HFT, because they do take risks.  The difference with strictly trading a mechanical advantages is that you do not choose when your career is over. Lets define “risk free” trading.  Anything that is a mechanical advantage and any purely systematic trading. Problems with “risk free” trading:

  • It is hard to understand if it is an aberration or the new rule. Many people go down with the ship or by the time they find the advantage it disappears.
  • Risk always catches up with you.  Not realizing risk does not mean the absence of risk.
  • Career traders look for things they can repeatable do.  Learning is where the pressure comes from.  Learning is does not  factor if you are relying on Pavlovian responses.
  • Not every trade is the same.  You can never learn how to trade larger risking the same dollar amount.  The dollar amount you are down is more important of a factor in position size than market conditions.
  • All “risk free” trading is backward looking.  It is relying strictly on what happened in the past and those successes.  If the regulatory bodies got one thing right it is the standard disclaimer that most people ignore, “Past results are no indication of future performance”.
The reason I would be broke if I made money every trade is that my goal would be to make money every trade instead of take the most out of what is available.  I would never know which trades were better.  I would trade every trade the same way.  In the interview process for our clients the number 1 thing they are trying to accomplish is holding their winners. The questions that we ask are: does your plan allow you to hold your winners?  When should you look to hold it longer?  What if your winners are larger positions than your losers?  How are you defining a winner?

If every trader started off looking at ways they can get comfortable with risk instead of avoiding it they would be in a lot better place.  It was sad to see my friend disappear but it was easy to see that it was going to happen.

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  • Good post, Eli. One more for your list: By eliminating risk, you eliminate opportunity.

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  • In options, this is a common trap many investors fall into regarding RISK.  James Coridor talks about this.  

    1.  Know the Difference between Potential Profit and Potential for ProfitExample: You are told if heating oil increases by 30% in next 30 days, the spread will make 3500$, what is the risk you ask? A mere 300$ “My risk is limited, great let me buy in”But what is the potential forprofit? What is the likelihood of this type of move in the market? Probably pretty slim.  Investors are willing to put their money into a strategy such as buying an option that will expire close to 80 percent of the time. “Sure I lost all my money, but I limited my risk!” 2: Focus on Managing Risk, Not Limiting Risk

    If you use an investment vehicle that has built-in limited risk, you give up a huge likelihood of chances for profit.

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5 Responses to If you make money every trade you will eventually be broke.

  1. Benko says:

    Good post, Eli. One more for your list: By eliminating risk, you eliminate opportunity.

  2. […] If you make money on every trade you will go broke.  (Trader Habits) […]

  3. In options, this is a common trap many investors fall into regarding RISK.  James Coridor talks about this.  

    1.  Know the Difference between Potential Profit and Potential for ProfitExample: You are told if heating oil increases by 30% in next 30 days, the spread will make 3500$, what is the risk you ask? A mere 300$ “My risk is limited, great let me buy in”But what is the potential forprofit? What is the likelihood of this type of move in the market? Probably pretty slim.  Investors are willing to put their money into a strategy such as buying an option that will expire close to 80 percent of the time. “Sure I lost all my money, but I limited my risk!” 2: Focus on Managing Risk, Not Limiting Risk

    If you use an investment vehicle that has built-in limited risk, you give up a huge likelihood of chances for profit.

  4. […] If you make money on every trade you will go broke.  (Trader Habits) […]

  5. […] in not even but it is making strides in fairness.  If you learn how to trade and not rely on a mechanical advantage you will do much better in the long […]

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