The Simple Secret to Successful Trading

Hint: it's not about winning percentage

I’m a former Wall Street analyst and hedge fund manager.

And I’ve been trading stocks for a long time.

And the most common question I’ve been asked during my 30+ years of trading is this:

“What is your winning percentage?”

Which is a good question.

But it’s not the most important question.

In fact, it’s not even close to the most important question.

So if winning percentage isn’t the most important factor in trading, then what is?

The real most important factor in successful trading is how much you make when right and how much you lose when you’re wrong.

But don’t just take my word for it.

Listen to the words of billionaire hedge fund manager George Soros.

George Soros had made over $40 billion during his career as a hedge fund manager.

In the early 1990s, his fund made over a billion dollars betting against the Bank of England.

George Soros is unquestionably one of the best traders of all time.

There’s no doubt he knows what he’s talking about.

And Mr. Soros says this:

“I'm only rich because I know when I'm wrong. It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.”

While George’s words may sound obvious at first glance, they’re not so easy to deploy in real life trading scenarios.

Because it’s painful to admit when we’re wrong.

Our egos often prevent us from admitting that we’re wrong.

I know this because when I left Wall Street and started trading on my own, I felt I needed to be right all the time.

In fact, I believed I was so smart and so experienced that I deserved to be right all the time.

But the market doesn’t care about what we want or think we deserve.

It took me a while to realize this, but once I did I made a few little adjustments.

And my trading improved dramatically.

Most novice traders never get to this point.

Their need to be right all the time prevents them from ever making real progress as a trader.

This is a major problem.

Because even the best investors in the world are wrong.

And not just occasionally.

The best investors in the world are wrong a lot.

Ken Griffin - - founder of Citadel, one of the largest and most successful hedge funds in the world  - - recently said that his BEST analysts are right only about 54% of the time.

So in order to be a great investor or trader, you have to be okay with being wrong frequently.

And also to be able to quickly move on to the next opportunity whenever your ideas are wrong.

But because most novices won’t admit when they’re wrong, they end up holding on to losing positions for far too long.

And eventually they get wiped out by a few big losses.

This devastating situation can be avoided with one simple process.

It’s not easy.  

But it is simple.

And since it’s simple, everyone can do it.

Most people simply won’t learn how to do it.

Or their ego won’t let them apply it consistently.

But if you’ve started trading (or you want to start trading) and you’re looking for a simple way to improve your trading skills, try this:

Have a system for taking losses while they're small so you don’t have to agonize over what action to take when your trades don’t go as initially planned.

Before you place every trade, set a price point where you automatically exit your trade when it starts going against you.

And once you have a predetermined stop loss in place, your next step is to try to maximize your gains when your trades are working.

This is the opposite of what most novice traders (and investors) do when they first start trading.

Most novice traders and investors hold on to losing positions too long and take profits too quickly.

In other words…

Most novice traders and investors are like bad gardeners.

They water the weeds and trim the flowers.

Why do so many people make the same mistakes when it comes to trading or investing?

It comes down to simple human psychology.

Modern society conditions us to take action which provides us short term gratification.

Advertisers tell us that we’ll feel instantly gratified if we buy the product they’re selling.

Short spurts of social media attention - - such as someone liking a picture or post on Facebook or Instagram - - make us feel good.

Reacting with righteous indignation to something a political figure says or does gives us a feeling of instant - - but fleeting - - gratification.

But the need for instant gratification is your enemy as a trader or investor.

And because we are all so conditioned by modern society to succumb to the siren calls of pain avoidance and instant gratification, to be successful traders and investors we must have a system which blocks out these tempting siren’s calls.

The way you can do that is to structure every trade to have more reward potential than risk.

For example, if you’re willing to risk $100 on a single trade, the trade should have several hundred dollars of potential reward if it works out.

Another billionaire hedge fund manager - - Paul Tudor Jones  - - takes this mindset/process a step further.

Jones says this:

“[I’m looking for] 5:1 (risk /reward).  Five to one means I’m risking one dollar to make five.  

What five to one [risk to reward] 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.”

Now, you don’t always have to wait for a 5:1 reward/risk setup before placing every trade.

And you certainly aren’t an imbecile if you happen to be losing on most of your trades. 

Especially if you are just learning how to trade.

But the point is this.

Every successful trader I know looks for trades with a favorable reward/risk profile.

I show how to do this with a short 3 minute video almost every day on my new Youtube channel:

https://www.youtube.com/@EquityEmpireJohnMcHugh

Here’s one of my videos where I showed a textbook high reward / low risk trade setup:

https://www.youtube.com/watch?v=rU2aWRvepxM

This is how the trade setup has played out so far:

The stock I described in the video two weeks ago has played out almost exactly as planned. 

It’s currently up 34 points from the entry price I pointed out.

And since the trade setup had a stop loss just 2.50 below the entry price, if you had placed the trade and held on to the close on Friday, you’d be sitting on a paper profit that’s more than 13x your predetermined risk of the trade.

Let me put this in perspective for you.

If you place a trade that results in a profit that’s 13x the risk you were willing to take in the trade, you can literally screw up your next 13 trades. 

And you'll still be breakeven from the moment before you placed the big winning trade!

Since losing 13 times in a row is highly unlikely, you can start to see how important it is to make the most of your winning trades.

But even more importantly, how important it is to limit your losses.

And this is the secret to successful trading.

Cut your losses quickly and let your profits run.

Water your flowers and rip out your weeds.

Be a good gardner and watch your trading account flourish.

Your personal Wall Street analyst and trading instructor,

John McHugh