Managing Losses Is Only Half of the Equation

Editor’s Note: From Larry and the team, have a happy new year! We hope you enjoy today’s essay on the importance managing your losing positions… and your winners.

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Most investors are familiar with the common cliches about the markets…

Like only investing what you can afford to lose…

Or how you must have a clearly defined exit strategy when a trade goes against you.

These adages have stuck around.

Because whether you’re trading your own private account or running a billion-dollar hedge fund, one thing doesn’t change – we all have a limited amount of capital.

And no one can afford to let money slide off the table.

That’s why some traders will close a position if a trade goes a fixed percentage against them – like 5%.

Others use a dollar-amount stop loss.

For instance, traders with a $10,000 trading account might only allow themselves to risk $300 per trade.

However, it’s a mistake to think that risk management strategies only apply to managing losses.

While capping losses is key to not blowing up your trading account – how you manage your winners is just as important.

The Situation Has Changed

With the markets as volatile as they have been this year, we must be ready to take money off the table when we see it.

Yet some investors are still grappling with just how much the market has changed…

Up until 2021, investors could buy the dip and then hang on for the ride.

It often worked. We saw countless stocks make double- or even triple-digit returns.

But using that strategy this year has buried those same investors… not just by letting their losing trades run – but also by how they manage the profitable ones.

After entering a trade that initially went their way, they blindly hold on, expecting to see similar gains to previous years.

So, when a winner turns into a loser, they dig in their heels rather than jump out of the trade.

And in doing so, they burn big holes into their account.

Locking in Our Wins

In my options trading services, we’ve done the exact opposite this year… which has allowed us to vastly outperform the markets.

We enter trades with strong setups and don’t let profitable trades turn into losers. We take the money off the table when we see it.

And while some trades have seen significant gains, not all of them have been big winners.

For example, in October we closed out an options trade on JPMorgan Chase (JPM) for an 89.7% gain in my Opportunistic Trader service.

The same day, though, we closed out an options trade on the iShares 20 Plus Year Treasury Bond (TLT) for a mere 3.6% gain.

We saw that our TLT calls were rising and falling with the broader market, adding to the overall correlation of our positions at the time. So we decided to de-risk our portfolio and took a small profit on TLT.

Both of these were healthy moves. The key to successful trading is to continuously bank your winners – no matter how small or large.

Simply hoping for home run trades isn’t enough in this market.

Traders must understand that they can only make what the market allows them to.

Small gains – like the 3% we made on TLT – all add up in the long run and contribute to your long-term success as a trader.

When markets fall as heavily as they’ve done this year, how you manage your losses is important.

But managing losses is only half of the equation.

Equally focusing on how you manage your winning trades will give you that extra edge as a trader.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict