The Secret Active Traders Use to Make Tons of Money

The Secret Active Traders Use to Make Tons of Money

BY WILLIAM MCCANLESS, ANALYST, THE SEASONALITY INVESTOR

All professional traders know this secret: “win rate” has nothing to do with making money.

When I talk to most aspiring traders, this blows their mind.

But I’ve also talked to A LOT of proprietary trading firms – from Canada to Singapore.

And do you know what they do when someone walks into their office and touts their win rate?

They laugh them out of the building.

The most successful traders at proprietary trading firms have about a 40% win-rate.

That means they lose 60% of their trades.

Yet they still “print” money every day.

Does that sound weird?

Take a look at this:

Below you’ll see what happened when I put $3,000 into an account with a futures broker called Tradovate, then traded specifically the S&P 500 Futures from July 31 to August 28, 2023.

These were just day trades, which everyone says you “can’t be successful at.”

So, how’d it work out for me?

I lost about 65% of my trades.

That means I lost a lot of money, right?

Actually – I DOUBLED my account for a 100% return, making over $3,000 in profit.

Above, you can see a screenshot of my account history between July 31 and Aug. 29, 2023.

On the bottom left, outlined in red, is my profit: $3,058. This is the total profit after fees and commissions.

On the far right – also outlined in red – you see my win rate: 35.6%. So, I lost nearly 65% of my trades.

But how did I make money if I’m such a HORRIBLE trader who is wrong most of the time?

Well, the middle columns tell the story.

On the left green rectangle, you see my average winning trade is $118.

On the right green rectangle, you see my average losing trade is $40.

That means my winning trades are three times bigger than my losers, on average.

And when you turn to my BIGGEST outcomes, you see that my biggest winner was $1,010, while my biggest loser was $282.50.

So, my biggest winning trade was more than 3.5x my biggest losing trade.

Of course, day trading is a lot different than the type of trading I’ll recommend at The Seasonality Investor, which has a much higher win-rate (in the realm of 80% in our backtest of TradeSmith optimal seasonal windows).

But the lesson here is important – win rate doesn’t actually matter and it’s a completely useless metric.

Herein lies the biggest secret to successful trading:

It’s not about being RIGHT, it’s about being PROFITABLE.

In other words – it’s a RISK MANAGEMENT game.

All the best traders understand this. That’s why they NEVER care about losing or being wrong.

They just want, say, a 5:1 risk/reward, like Paul Tudor Jones does:

“Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.”

“Being right” and having a high win rate does not matter.

I know people who have 90% win-rates who have completely blown up their accounts and are down year after year.

I literally knew a guy who maintained an 85% to 90% win-rate for 11 YEARS STRAIGHT trading options credit spreads.

Guess what? He lost money every single year. Because his risk-to-reward ratio was skewed in the wrong direction. 

All it took was losing ONE or TWO out of 10 trades to wipe out five or so of his winners.

He stood to lose 4x to 5x what he could make on his trades…

Rather than standing to make 3x to 5x what he could lose.

He touted his strategy as “low risk,” because he was so overly concerned with the probability of his trades being correct.

But in order to have such a high probability, you have to construct the trade in a way that it barely pays you any money. No risk, no reward.

To be a successful trader, you’ve got to:

1. Find setups that have a good risk-to-reward ratio.
2. Take the trade with an appropriate position size.
3. Then walk away and let the trade either work or not.

Here’s the fact of the matter – you cannot control the market.

The sooner you relinquish all control, the better.

But you CAN control your risk and your reward. In fact, it’s the ONLY thing you can control.

That’s what separates a trader from a gambler at a casino:

The gambler cannot control their risk/reward. A trader can.

So, once you find a setup with a strong risk/reward ratio and you enter that trade – your job is finished at that point – because you managed your risk.

Seasonality Investor Position Sizing and Risk Management Rules

In The Seasonality Investor, I will always seek to find trade ideas that have optimal risk-to-reward setups with as many variables in favor of the trade as possible.

But the rest is up to you as a responsible risk manager.

And how do you do that?

Well – everything begins with your position sizing.

The Golden Rule: Never Risk More Than 5% of Your Account on Any Single Trade

Personally, I risk 2% of my account on any single trade by default.

If I have a VERY high conviction on a trade, I will go up to 5%, but no further.

If you risk 5% of your account, that means you would need to lose 20 trades in a row to go to zero. And it also means you can be in up to 20 trades at a single time.

If you risk 2% of your account per trade, it means you would need to lose 50 trades in a row in order to go to zero. And if you’re doing 2% each… 50 trades is all of them.

I consider the COST of the trade to be the total risk.

For example, if the trade is an options trade and one option costs $500 – then I consider the ENTIRE $500 as our total risk.

This is different from what many people will do.

For example, they will buy an option for $500 and then tell themselves: “If the option loses 50% of its value, I’ll get out of the trade.” So, they think of $250 as their total risk.

That would represent a 2.5% total risk on a $10,000 account, for example.

But I don’t do that – and I suggest you don’t, either.

You see, when I buy an option – in this example, for $500 – I proceed under the assumption that I have now lost 100% of that money and that my position will go to zero.

This accomplishes two very important things:

1. It stops me from micromanaging the position or exiting a position just because it’s temporarily down… just to watch it rebound later.
2. It gives me strong hands and prepares me mentally for inevitable losses (because I assume my money is already gone).

I used to run a live trading service.

And every time I signaled a trade – inevitably, somebody who had racked up a good string of recent winners using my recommendations would always get greedy and put on WAY too much size.

Then when the position was down – the messages would start flooding into the chat:

“Should I sell? Do you think it will rebound?”

They would start looking for any shred of information or evidence that the trade would work out.

And they’d message me at all hours of the day or night, looking for reassurance.

Why? Because they put on TOO MUCH SIZE.

If you are putting on a trade and you are not 100% willing to lose ALL of the money you just invested…

And the thought of losing that money would keep you up at night, make your palms sweat, and make you bite your nails…

Every time you see a red candle, you’d feel like somebody is stabbing you in the gut with a knife…

Well, my friend, these are the better choices:

DON’T TAKE THE TRADE.

Or, at least, take the trade with a position size that is appropriate – between 1% and 5% of your account.

Choose to ignore this advice at your own risk.

Because one day you will experience a string of winners.

You will think to yourself, “Wow, if I just add on some more size, I could make a lot of money FASTER! These trades are working out great!”

I have seen it more times than I can count. I’ve EXPERIENCED it several times myself.

And maybe you will make a lot more money faster… for a while.

You’ll get more and more confident and add on more and more size – envisioning the Lamborghini you’re going to buy and the first-class flights you’re about to book as you trade by the ocean and pull in the millions.

Then the losses will come – and you will go to zero.

All because of bad risk management and “revenge trading”: trying to double down on the next trade to win back what you lost.

You’ll be better off following my advice, managing your risk, and trusting the process – relying on larger rewards than what you risk.

Even LOSING six out of every 10 trades can DOUBLE your account – as we saw earlier – if you have the fortitude to hold onto winners and cut losers.

You cannot cultivate this mental fortitude if you are trading too large. Yet it becomes easy when your risk is appropriate and you can trust the process.

Focus on Your Stats – Not Your Money

Another very important tip is:

NEVER concentrate on the amount of money your trades are making or that your account is growing by.

This can make you feel discouraged.

Instead – focus on the PERCENTAGES that you’re making and growing your account by.

For example, did you make 2% on that trade? 3%? 4%, over a five- to 30-day time span?

Most people take several months and maybe even a year to see such a gain.

Did your overall account grow by 2% or 3% that month? If you have a $1,000 account, that can seem so small because it’s only $20 or $30.

But, if you’re able to grow your account at around that pace over the next 12 months, you’re looking at 24% to 36%. 

That’s beating the S&P 500 and pretty much any money market fund – and definitely beating inflation.

So, no matter how small of an account you have, the question is:

“Did you put your capital to superior use by actively trading it versus most other alternatives out there?”

If so – you’re winning.

I would suggest starting with a small amount of capital anyway and trading it up over the course of six months while saving money for future trades.

Then, once you’re comfortable that you’re getting good results, add some more savings, and so on.

That’s all for now. Let’s find the next best trade!

William McCanless
Analyst, The Seasonality Investor