Chris’ note: Regular readers know that all week, we’re featuring top trader Larry Benedict’s insights.
Over the past few days, Larry’s given us a sneak peek into his process, which helped him become a billion-dollar hedge fund manager.
And today, he takes us all the way back to his beginning to reveal one of the most important lessons that can help you succeed in the market.
It’s at the core of what Larry will use to generate at least $70,000 in less than an hour in his upcoming Trade-a-Thon…
And Larry explains it in detail below…
By Larry Benedict, editor, The Opportunistic Trader
I started with $10,000…
And I kept losing all of it.
This was back in 1984. I started out on the floor of the Chicago Board Options Exchange, with thousands of dollars of my own money to trade with.
But I chewed through it all probably two or three times by making silly mistakes. Things like being too impulsive, going for the home run, or holding onto losers too long…
All the basic “no-no’s” of trading.
Larry (right) on the floor of the Chicago Board Options Exchange in the mid-1980s
At the same time, I had a buddy named Andy who was making money every day. But I couldn’t figure out what he was doing different.
I called my mom and told her Andy was making so much money while I was losing all of mine.
She said, “Just do what he’s doing.”
It took me a long time to realize what Andy was doing differently. I had a couple more complete blowouts after that phone call before I really understood it.
But it was simple…
Andy was letting profits slowly trickle in – rather than going all-in on one risky trade idea.
And in doing that, he was slowly but surely building a strong base of capital.
In other words, Andy was putting a “p” (profit) on the page – no matter how small or large – and consistently growing his base of capital.
This mindset seems obvious and easy to follow, but most new traders don’t think this way…
First, it’s because they get attached to their losers. They sit on a losing position, hoping it will eventually become profitable… and it usually doesn’t.
And second, they never take a profit unless it’s a grand slam. They’ll keep pressing on a winner, even when they’re losing money overall. They think that’s the only way to be successful.
But that’s the wrong line of thinking… and it’s a major pitfall new traders tend to fall into. They don’t understand how to size their positions according to how they’re trading. They don’t earn the risk they take, by building up a large capital base with small profits first.
Understanding how to do that is the most important thing in trading.
It took me a long time to grasp this concept. But each time I chewed through all of my own capital, I learned something. I got closer to learning how to let go of losers and avoid impulsive trades.
Then, I got picked up by another firm, and they gave me some money to trade and a shot.
And over time, I began to figure out proper money management.
Earn Your Risk
Trading is a business. And like any business, you have to have a goal of what you want to make, and a plan to hit that goal.
When I was running my hedge fund, that was the only way I did business. I had clients write down a number on a piece of paper, and that’s what I made for them.
Similar to those clients, anyone who’s serious about trading should have a goal of what they want to make. A number on a piece of paper that they’re going to make in one month… two months… or whatever time frame it may be.
You should always look to put a “P” on the page. It doesn’t matter if the profit is small – if you have it, you take it.
This is the only reliable way to hit your trading goals.
Most traders want to make a specific amount of money… but also get there in the fastest way possible. They over-leverage their positions, load up on risky bets, and get blown up.
That’s a fast way to become poor, not rich.
The smart trader… The one who’s in the vast minority… The one like Andy… is taking small profits every single day.
And if you keep doing that, over and over again, you accumulate a larger base of capital and can afford higher levels of risk… which inevitably leads to bigger rewards.
Trading this way means your winners will outweigh your losers. You won’t be all-in on one high-risk idea – the harbinger of death in the trading world.
But, it takes both practicing on your own and learning from others. I was lucky because I made all my mistakes early on in my career and was willing and able to bounce back.
The reason I’m telling you all this is to inspire you. Anyone can start small and become a big-time trader – especially if I could do it…
It all starts with learning how to slowly put profits on the page until you “earn” the ability to take on more risk.
Editor, The Opportunistic Trader
Chris’ note: If you want more insights from Larry’s trading wisdom, we have good news…
Larry just released the first video in a limited-edition series, where you’ll get a firsthand look at the life he’s built over 35 years trading the markets… why he’s coming forward now… and how he’s preparing for his Trade-a-Thon on December 11.
You can sign up to access all these videos by going right here.