The Market is a tough place to make money. You will be hurt if you think you are a genius or know what you are doing. If you don't quit while you are on top, you eventually will be wiped out. If you are trading options, making a ton, and think you will continue in the long term, you are dead wrong. Those who trade options are most at risk.
An accurate risk management model needs to be developed to compound the issue. This is proven by how the Quants could not predict or mitigate the 2007 Market crash and several hedge funds getting squeezed out of billions due to their arrogant Gamestop ($GME) and $AMC shorts. You are only kidding yourself if you think you are properly risk-managed because you are not. To be truly risk-managed you must have a full understanding of the Market. In reality, no one has such an understanding (or they would be able to make unlimited money). A lot of these "million to one" events seem to happen every so often i.e. GameStop Squeeze, the Coronavirus Pandemic, and the 2008 financial collapse. Blackswan events are just too common, the improbable continues to become a reality.
It's worth noting at any point you have all your money in the market, you face the "Risk Of Ruin" (chance of losing it all). You never want to be put in that position especially if you have an "edge" in the Market.
I think not all hope is lost, I have a few tips that can help make sure you can trade the market for the next 30 years. However, the catch is, that you need to have a real edge. I am not talking about the phony fake advice posted on all of Twitter or what these sub-services try to sell you by using MACD indicators and "break out" setups drawing silly triangles all over their charts. Those don't work. Real edges aren't given away. They aren't sold, they are kept secret.
First, you need to have a quick accurate edge (don't bother, unlikely any of you have or ever will discover one), one that allows you to be in and out in 24 hours with good profit (not day trading). This edge should have at least a 75%+ accuracy. You have an exponentially higher chance of never getting hit hard in the Market where you trade quickly (within an 18-hour time frame). This is an important concept, the longer you are in the Market the more risk you take. Note, that an 18-hour time frame can span two trading days. Where you buy at the close of one day and sell at the opening of another.
Your edge won't last forever (assuming you have a real one), often "setups" (use the term loosely) can evolve. You will need to pick up on this fast as possible without ever going broke, or getting hit hard. To do this, the only solution that may save you is never investing more than 3-5% of your portfolio. This way you can either adapt your edge if it isn't working or realize you no longer have one and can get out safely. Don't bother with "hedging your position", that is nonsense. Correlation is made to break, it isn't a guarantee. When things go really bad (i.e. when you need a hedge the most), correlations get wiped out (look at the Coronavirus Pandemic: Gold, Oil, Bitcoin, and Stocks all wiped at once)!
Assuming your edge fits a quick time frame and is accurate you *might* be ok trading via options. As your risk is now capped, and your upside is unlimited. In this case, you will need to always take money off the table quickly, it's okay to leave some profits on the table and hold a fraction of your initial option position to let the stock run (i.e. say you made 60% with options, sell enough that makes you some profit and leave the other options on the table for a potential continuation).
I have often debated the best way to trade, not the one that makes the most money, but the one that has the highest chance of making money over 30+ years. That is to trade quickly and invest very little of your portfolio. The catch is that this type of trading requires a huge account, where trimming and 3-5% gains matter in terms of profitability. In other words, the more money you have the more money you will make.
The strategy I listed above is unlikely to help many of you because finding a truly profitable edge is unlikely. If it does exist you won't find it on Twitter or in books. Everyone needs to realize they are not a genius, the Market is nearly impossible to beat in the long term. It is just better not to play it. You will go broke in the long term. You are unlikely the exception. Just put your money in an index fund.
Now for the next step, if this article has inspired you, read our in-depth article on how to create an edge for your current trading system as well as how to create a trading system. These articles provide information on how to create a trading edge & system to enable you to be that 1% that makes money.
Now for the next step, if this article has inspired you, read our in-depth article on how to create an edge for your current trading system as well as how to create a trading system. These articles provide information on how to create a trading edge & system to enable you to be that 1% that makes money.