This morning I closed half a trade for roughly a 300% gain.
I’m holding the other half, shooting for a grand slam home run, something like 700%. And not long ago, I had 14 or 15 losing trades running one of my strategies.
People turn on you during a stretch like that…
You had five losing trades in a row, they tell me. I’m like, I know, man, I’m going for 10.
Most traders judge a strategy by its win rate, the percentage of trades that make money.
A professional judges it by what’s left at the end of a string of 100 trades, because the win rate leaves out the size of the wins and the size of the losses.
How One $700 Winner Pays For 6 Losing Trades
Say you risk $100 on a trade that can pay 700%, or $700. You only need one of those to account for six or seven losing trades. Lose 6 out of 7 times, and you still come out $100 ahead.
Now flip it. Say you win 9 trades out of 10 and make $50 each time, for $450. One bad loss of $500 wipes out all of it, and then some.
High-probability trading is like being an airline pilot. You have win after win after win. Then you have five minutes of sheer hell, when the market doesn’t do what you think it’s going to do.
So a pro looks at both numbers together: how often you win times how much you make, against how often you lose times how much you give back.
My 5 winners after that cold streak chipped away at a huge chunk of the losses, and I didn’t need a high win rate to do it.
Why High-Probability Trading Needs A $200,000 Account
I was hanging out last week with Tom Sosnoff, who co-founded thinkorswim and tastytrade. It reminded me of the fight we used to have.
Tom always wanted me to do high-probability trades, like Christmas tree spreads, which are built to win small and win often. His reason: “People always want to feel like they’re winning.”
I agree, people definitely want to feel like they’re winning. You can absolutely trade that way and make a damn good living. But not everybody has a $100 million account, and that was the disconnect for Tom.
High-probability trades are margin intensive, meaning they tie up a lot of your buying power to make a little.
To do any real damage, you need a portfolio margin account, where your broker sets your margin based on the risk of your whole portfolio. Schwab won’t open one for less than $125,000, and realistically you’re north of $200,000 to $250,000.
Sell Half At 300% And Let The Rest Run For 700%
This morning I was shooting for $2.65 on the first half. I don’t like to chase, and I do a little better when I let these trades come to me. I took $2.50.
Closing half locks in the 300%, and the rest keeps a shot at the 700% grand slam, the kind of win that pays for six or seven losers.
You’re going to go through hot streaks, and you’re going to go through cold streaks.
To your success,
Don Kaufman
