Safe Trading: How To Avoid Getting Rekt
Part I - The Golden Rule
If I wanted to learn how to play golf, I wouldn't seek out advice from someone who had only been playing for a few months, and if I needed a good lawyer I wouldn't look to hire one who was still in law school, and yet here I am, a poker player and coach for the past 15+ years, about to offer you trading advice while holding less than two years’ experience in the market. And although I see the obvious irony, I strongly believe there's value to be had, and here's why....As with most poker-player-turned-trader converts, I was introduced to trading through Bitcoin and cryptocurrencies, inspired by a bull run for the ages and the glaring similarities to the game I had built my life around. Unfortunately, my inexperience with a bear market meant I left incalculable value on the table making mistakes I could have easily avoided had I had a mentor, or someone similar looking out for my best interests.??
Instead, my education of the market began as a solitary exploration through countless books, podcasts, and videos, as I sought out experienced traders who had survived the swings on both ends of the pendulum, many of whom had lived through much the same cycle we did with cryptocurrencies in 2017 during the wild dotcom era. It is those traders in particular that interested me most; studying how they handled the realization that their earliest successes were almost assuredly the result of a parabolic market as opposed to some innate ability to trade. How did they deal with the losses that followed? ??
What did they need to learn to remain in the market today? I took in hundreds, if not thousands, of ideas while seeking out those few sacred pieces of wisdom that made sense for my own trading style and slowly helped increase my consistency and profitability, which I continue to work on today. And while I finally feel a small sense of comfort with the baseline I've created for myself, it took far too much stress to get here, and most definitely cost me more than it needed to. Fortunately, thanks to nearly two decades of experience with risk assessment & bankroll management as a poker player, my market tuition – which all new traders must pay – never put me in any real jeopardy, never put risk-of-ruin in play.
So that's what I hope to do with this blog, not to offer advice about the hottest altcoins or best price-levels to target, not to sell you courses or access to live trading rooms, but rather to simply share some of the ideas that helped bring balance to my trading. These aren't the types of concepts that will make you money directly, but rather will prevent you from losing a whole lot of it when first starting out. Because although I might not be experienced enough to turn you into a great trader, I'm confident I can help protect you from beginning your journey as a truly terrible one, as I wish someone had done for me in my earliest days.
So while you should most definitely not take my opinions on the market as gospel – in fact, not trusting anyone but yourself should be a fundamental part of your mindset as an inexperienced trader – you can trust my understanding of how difficult it is to extract value from an opponent who is doing everything in their power to extract that very same value from you.
So as you continue reading, please keep in mind that although I'll be sharing some specific rules and strategies I've instilled within my own trading style, these are only MY rules, built for MY unique set of circumstances and should be looked at as nothing more than examples as you build your own.
Now, with that said, there are a handful of quasi-universal truths when it comes to trading that will be as sensible coming from me as they would be from Warren Buffett himself, arguably the greatest investor of all time. A bold statement perhaps, but one I can make with relative confidence due to the fact that if there's one thing I've learned over the years, a single lesson I've taken away from nearly two decades in the money-flipping game, it's this:
RISK IS RISK IS RISK!
No matter the field, no matter the context, if risk is involved, bringing with it the very real threat of pain and loss, there are only two rules that truly matter, two rules that supersede all others by a wide, wide, margin.
To quote Mr. Buffett:
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
Now obviously you don't become one of the richest men on the planet without sustaining some significant losses along the way, just like you don't become a poker professional without losing your fair share of pots, but 'capital preservation is the key to long-term sustainability' sounds a lot less sexy than 'never lose money.'
But regardless of how we word it, or whether we're talking about poker, day trading bitcoin, or investing in Crude Oil, the one mistake that will end the journey faster than all the others, the single unforgiving error with a survival rate as close to zero as exists is, without a doubt, poor bankroll management.
Just as inexperienced poker players are often much too eager to get their chips in the pot without first figuring out their edge, so too is there an almost universal impulse to start firing off every which way when first getting into trading. Not only is this clearly just a bad idea – you wouldn't expect to hit a home-run against an MLB pitcher, so why would you expect to do the equivalent in a market filled with similar heavyweights (who, it would behoove us to recognize, hold much, much more leverage than even the greatest pitcher ever did)? And when this suboptimal bankroll-management is paired with a poor stop-loss strategy, the amount of pain possible will be limited only by the length of time it takes you to go bust – which, for 85% of traders, will be less than two years!
So, in an effort to give myself more favorable odds than near-certain ruin, I've used the risk management tools that took me more than a decade at the poker table to hone to develop a set of trading rules for myself in a number of critical areas, one of which I'll discuss today, with the others coming in the next installment.
The Golden Rule
Without a doubt, the question I've been asked most frequently by poker students is how many buy-ins are recommended for each given limit. And without fail, the answer I've given time and time again is that although there may be small variations depending on the specific game format, the Golden Rule that must be obeyed is 100 buy-ins if you have the ability to reload, and 200 if you do not.
Fortunately, it appears that conventional trading wisdom has arrived at very similar guidelines (after all, risk is risk is risk, remember?). This advice is as follows:
Never put more than 1-2% of your bankroll at risk in any one trade.
It's important to note however that this does not mean each trade can only ever lose 2% of that particular position, but rather that each trade's maximum loss (including trading fees!) cannot represent more than 2% of the entire bankroll.
So, imagining you have a small trading bankroll of $1000 – be it in USD or the equivalent in Bitcoin – regardless of what percentage you place on each individual position, the loss on the trade cannot exceed $20 (with $10 being the more conservative option). And while that might seem limiting on your ability to earn – it will be at first – the focus for all new traders, regardless of bankroll or trade size, has got to be about the process itself, about developing a profitable trading plan and, most importantly for those wanting to remain in the game past that magical 2-year mark, building consistency.
Because if you are passionate about learning to trade and becoming profitable for the long-run, the only way to reach competence as an amateur is to employ the humility required to recognize that unless you are lucky enough to catch the front-end of a dotcom or bitcoin type “bubble”, you're all-but-guaranteed to begin your trading career with a significant period of inconsistency and loss.
Therefore, with that unfortunate reality in mind, the optimal approach is to view each individual trade as an opportunity to further develop the fundamentals that will carry you through your trading journey for years to come, even if it has to start $10 at a time. Because the truth is that if you're good enough to be in the 15% who will survive the first two years, those $10 trading days are all but guaranteed to be long gone.
So before you begin googling the best indicator to use, or even which stock or coin to trade, make sure to take some time to reflect on your own unique financial situation and come up with a set of bankroll management rules that will keep you safe in the meantime.
Or, as Mr. Buffett once said:
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Stay tuned for Part II of Safe Trading.
Follow Yaniv on Twitter & Instagram at @YanTheTrader or visit his blog at Unfelted.com