Mike’s note: This week, we continue our special evening edition of the Market Minute with master hedge fund trader Larry Benedict. In today’s essay, he reveals a simple trading strategy that most new traders ignore, and the three variables that are essential for success…
Once Larry figured out these variables, he started seeing more gains in a shorter amount of time. By following these types of techniques through his decades of trading, Larry eventually noticed a pattern during a short, but volatile, week in the markets that could generate large profits. He calls it the “7-Day Blitz,” and it’s going to happen soon…
Join Larry this Wednesday, March 10 at 8 p.m. ET, for his presentation on this little-known trading period, and discover the one ticker you can use to see large gains. Click here to sign up… It won’t last long.
By Larry Benedict, editor, The Opportunistic Trader
Do me a favor… And take a look at your portfolio.
How many positions in there are losers that you’ve been hanging onto for too long? Have you justified holding those positions because of one or two big winners you scored some time ago?
If that’s the case, I wouldn’t be too surprised…
Situations like this are all too common with new traders. When most traders first start out, they might hit one or two big wins and think they have it all figured out. Then, when the losers come in, they convince themselves they aren’t bothered. After all, they must be doing something right. They scored those first two big wins!
Still, though, those losers take up space in the trader’s mind. The urge to hold on in the hopes of breaking even becomes stronger than the logical move – to cut them and refocus for the next trade.
This happened a lot to me, too, when I first started trading. But when I started thinking about my trades as not just winners or losers… And started thinking about a different, even more important commodity… It completely changed the way I trade.
A lot of traders fail to implement this concept into their trading discipline. And, as a result, they hold onto bad trades too long and take a big hit on their overall P&L (profit and loss).
So, while it might feel like they’re making a bunch of money on one or two home-run trades per year… When you factor in the losers, they’re actually making much less than they could be.
The “Time Value of Money”
It all comes down to something I call the “time value of money”…
I think of it as how much time and capital you’re willing to allocate towards making a certain profit on a trade.
So, you have three variables… Time, capital, and profit target.
Essentially, you must look at how long you can afford to sit in a trade to make it work. This strategy can be applied to a winning trade that you’re up on, or a loser that you’re down on.
So, let’s say you’ve made some gains on a trade, and you’re wondering if you should stay in it longer to get a little more upside.
In my view, you should only stay in if you have a solid pile of capital and a string of good trading days. Otherwise, you’re wasting time that should be spent reallocating that capital into a better trade idea.
If you don’t have that capital, you should just take the gain. Every win, no matter how small, contributes to your capital pile and enables you to eventually take on more risk.
Now, let’s say you’re down on a trade and hoping it might turn around. Not by much, maybe 5% or 15%.
Again, if you’ve built up a good cash pile, you can afford to wait for a turnaround. But if not, you should just take the small loss and move on to another trade that has greater profit potential.
The most valuable asset you have isn’t money – it’s time. And if you’re wasting time as your money wastes away alongside it, your overall profit potential diminishes.
That combination is one of the biggest things that takes new traders out of the game.
Going Against the Grain
I go against the grain compared to most traders.
Most traders are looking to make 3,000% on that home-run trade. That happens, what, every few years maybe?
And if they’re up 60-70%, they aren’t taking that profit because it’s not 3,000%. To me, that’s just silly. If you have a 60% profit on a trade, take it!
That position could easily turn into a loser… Quickly.
As the days go by, and as you hold a position longer, you’re not only adding more risk to an already solid profit… You’re also keeping yourself from redeploying that profit into another opportunity.
Why wait? If you can pocket those gains, you can look to redeploy that money for even more gains. That’s the discipline and consistency I’m talking about. The potential for each trade to reach triple-digit gains is too low not to put a smaller profit on the page sooner.
The time value of money is all about considering the opportunities that may be missed. It’s making sure a winner doesn’t turn into a loser… Or preventing a loser from getting much worse.
The Right Frame of Mind
I’m not solely focused on getting the home run. I want to capture gains when I have them.
That might not sound as exciting as hitting doubles and triples on every trade you make, but it’s realistic.
Home runs aren’t necessary if you’re slowly, consistently letting gains trickle in.
The time value of money is the culmination of discipline and consistency. It’s strategic. You pick a number you’re not going to go past on the upside and the downside, and you execute – no matter what. You don’t let your emotions interfere with that plan.
With this strategy, you’re slowly pulling in profit after profit. That’s how you size up your pile of capital, eventually take on larger and riskier position sizes, and see exponential growth in your trading account.
And you know what? The gains might not look huge on a percentage basis…
But when you have a big enough cash pile, those small percentages can amount to thousands… Tens of thousands… Even millions of dollars.
It’s all about using the money you have in order to make more. If you’re in a losing position right now and hoping for a turnaround… Get out.
Save that money for another opportunity. You’ll be glad you did…
Best regards,
Larry Benedict
Editor, The Opportunistic Trader
P.S. When I trade, I like to keep things simple. If I’m ever in a spot where I have too many trades working at once, it helps to scale things back and just focus on what I know best.
During certain times, I like to scale back to trade just one ticker. And as it happens… We’re about to enter one of the best times to trade this ticker each year.
It’s an event I call “The “7-Day Blitz.” These events have led to some of the biggest gains of my career. And in a special presentation on Wednesday, March 10 at 8 p.m. ET, I’m going to show you exactly how.
Anyone who attends will get the name of this ticker… No strings attached. And I’ll also reveal the specific strategy I use to make sure I limit my risk and increase my odds of success. Just go right here to sign up.