Keeping your losses small leads to huge gains

There were times when I invited huge vol to my portfolio. It would run up 20% and then dive-bomb to -20%...that's intraweek!

The portfolio comprised of outright directional trades including long/short futures, debit option trades, and long stocks. 

What I found over time though, was that all this ebb and flow created an equity curve that looked like a heart monitor.

I had to find a way to create positive slope to the curve. That's how we keep score. 

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Moreover, it wasn't about the instruments that I was trading nor the combination of them, but HOW I was trading them.  

Once I determined that my up days and weeks were from a small semblance of skill and not luck, I had to learn to keep the profits that the market was "giving" me. 

Backtesting, I found the optimal points where I had to cut my losses and, more difficult than that, where to take profits without unwinding profitable trades too soon - to me, the hardest trade there is to make. 

In this episode, I remember how I had to make tough decisions around blue-chip names when you're taught that selling them is a sacrilege. (Watch the attached video to see what I mean.)

Our first order of business once we add risk, is to keep losses small. Once I did that in concert with learning tactical ways to take profits, my equity curve took off.

And that's not having to change my orientation to trading, the instruments I traded, nor the timeframes within which I traded.

Those two seemingly small adjustments led to huge gains and I didn't have to do that much to turn this situation around.