Mike’s note: Today, we’re featuring another special insight from Larry Benedict, the hedge fund market wizard who made $1 million in profits 509 separate times throughout his career.
For all those profits, though, Larry places one special asset ahead of money. And he considers it the most important element of a trader’s success…
(If you missed Wednesday night’s special event, and want to see the result of Larry’s challenge to generate at least $70,000 for charity, check it out right here.)
Would you rather have $10,000 in one year… or right now?
You’re probably thinking the latter. But, if you’re like most traders, you’re more likely to wind up in the former camp.
Here’s why…
A lot of traders fail to implement an important economic 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, on top of a number of losers, they’re actually make much LESS than they could be.
Today, I’ll show you how to avoid this profit trap…
When I talk about this concept, I call it the “time value of money.” Now, my idea of the time value of money is different from the broader economic concept – though they are somewhat related.
I think of it more 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.
Remember… you should only stay in if you’ve earned your risk by having 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 an even better trade idea.
If you haven’t earned that risk, 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 what 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 three 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.
As I write, I’m in a few trades right now that are up 30%… 50%… and 70%. I’ll probably go take profits on those as soon as I finish writing this.
Why wait? I can pocket those gains, and possibly redeploy that money for even more gains. That’s the discipline and consistency I’m talking about.
The time value of money is all about considering the opportunities that may be missed… the winner that might turn into a loser… or the loser that gets worse if you stay in longer than you should.
The Right Frame of Mind
I’m not focused on getting the home run. I just 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 have 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.
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 millions of dollars.
It’s all about using the money you have 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…
Regards,
Larry Benedict
Editor, The Opportunistic Trader
P.S. Thanks to everyone who turned up to Wednesday night’s event. I’m thrilled with the result of the challenge… We traded our way to a huge, $100k+ donation for Boca Helping Hands!
If you didn’t catch Wednesday night’s event, and still want to get a rare peek at my trading process, you can watch a replay right here.