The Hidden Trading Secrets of Wall Street (Part 6 of 7)

Many people mistakenly associate trading the financial markets with gambling. This is an unfair association and clearly displays those individuals lack of understanding. 

However there are a few things traders can learn from the world of professional gamblers - most notably how to play the odds of the market and how to manage risk! 

The famous country song once stated "you gotta know when to fold 'em" and one can easily apply this wisdom to the market. 

Holding bad trades too long and cutting good trades short is probably responsible for more trading account losses and stagnation than any other issue facing the trader. 

This lesson will address some of these issues.

Here's What You Will Discover:

  • How much reward you should expect from a trade
  • The truth about losses
  • The reality of diversification

VIDEO TRANSCRIPT (Click to expand)

[inaudible] hello and welcome

Back to the seven trading secrets. I am Jeremy Whaley and we are getting into day number six, if you're going through the daily routine on this, perhaps you've come across these videos in a different environment and maybe you're going through quicker. But if you're doing this the way they were designed, it's day number six, which is hard to believe it's been an entire week. I've been through a lot of really interesting content. Haven't we? Some pretty powerful secrets, but you know, perhaps the most important secret, well, it's hard to say what's the most important. Certainly the one we're about to share is one of the top secrets. And the reason is because it addresses the underlying fear that every trader has now, what does every trader afraid of? They're afraid of losing money. And so that's where we come into secret. Number six, you got to know when to fold them, know when to fold them.

Now, as I've already shared with you, I started my professional career as a musician, and I actually grew up in Nashville. Tennessee worked as a professional musician for almost a decade in recording studios here in Nashville. So music has been part of my background. And you may remember the old song, the old Kenny Rogers song, uh, called the gambler. You got to know when to hold them, know when to fold them. And it talks about knowing when it's time to let go knowing when it's time to let go. Here's what you need to know. Trading is not gambling contrary to a lot of popular belief out there. Trading is not gambling. That's not what it is now. It could be. I mean, if you're just randomly throwing money at it and hoping to, to hit it big, it could be. But here's what trading is.

Trading has a lot of similarities in the sense that there's known probabilities we can work with. Okay? So we can learn a lot from gamblers in simply understanding how they manage their money. Whenever we think about trading, there are certain statistics that we can work with. We know that every trade on its face value is going to have a 33% chance of making money. How do we know that? Well, it could go up. It could go down. It could go sideways. So you've got three directions. The trade could go. It could go up down sideways. That's one out of three is a 33.3, three three, three 33% chance. So no matter what, regardless of analysis, regardless of anything, if you just threw a dart at the board, you have a one in three opportunity to make money gamblers, understand that great gamblers know they can sustain a lot of small losses, but they have to make it up in the wind.

So if you know your percentages of wins, if you know that your percentage is going to be one at a three, that's all you have to do. Now we can construct a formula to, we make money on that. And that's where risk management comes into play. So whenever it comes to trading, you cannot frayed to take a loss. You can't be afraid to take a loss. Taking losses is part of trading. In fact, what you're going to discover. If you do the right money management, you can lose twice as many trades as you win and still make money. That's the reality. Now that plays with your psyche. Cause now we move out of just simply making money and we move, move into this whole arena of the psychology of winning, where people feel like I've got to win all the time in order to be making profits.

The reality is folks, if you have the right money management plan, if you have the right risk management plan, you could lose two out of three trades and stuff. We'll make a profit in the market consistently, right? You say, well, how do I do that? And here's how we do it. The formula is you need to be earning at least two, ideally $3 or more for every $1 that you lose in the market or every dollar that you put it. Yes. Now, how do you do that? It's something we call risk risk reward ratio. Okay. Now it's not necessarily how much capital you put into the trade, okay? Because the amount of capital you put in is one thing, but the amount that you're actually willing to take a loss on, that's the amount that we're going to call your work. And if you consistently make at least two, but ideally $3 or more for every tray that you lose, if you consistently make $2 and you only lose $1 in those trades, then over time, what's going to happen because you're actually out running your losses and you're consistently doing it.

It's a magical thing. And once you understand this formula, it actually becomes really, really forgiving. Because when you manage to these formulas, you can actually lose almost all the time. Not all the time. I mean, you have to win some, but you can lose 60% of the time and you can still actually beat the market. That's better than the fund managers, folks, better than the fund managers. Now, in addition to that, you can have to learn how to manage your risk per tray. And then I also teach people to diversify across multiple trades. You don't want everything in one particular trade. Okay? Yeah. So there's a, quite a few pieces of risk management, but every bit of these pieces of risk management, they can be simple. They really are. Well, the formula is simple. It's a simple three to one ratio. It's a simple, uh, management of your trades, usually about 10% of your portfolio.

And then we're going to diversify across multiple trades. And if you'll do that, here's the reality folks. No one ever needs to go broke. I blew out three trading accounts before I figured this stuff out. But now that I know this stuff there, there's no reason that anyone traders should ever go broke except for bad risk management. And like I say, I blew out trading accounts on average, the retail trader blows out their trading account. So, you know, that's why I always tell people, don't start with a, you know, big life savings for your trading account. Start with something small, learn how to manage that, learn how to make money with that. And then you can always scale that, uh, if start off with your life savings, you, you start off with everything and you can't afford to lose it, guess what? You're going to lose it.

So that's not where you want to start off. You wanna start off with something small, maybe a 5,000, maybe a $10,000 trading account. Something that if you lost it, it would stay a little bit, but you know, your life isn't devastated. I mean, come on. If your lives devastated over $5,000, we've got bigger problems than a $5,000 trading account. And so, you know, that's a good size to start with five to $10,000 is a good size to get started with. Um, if you do screw up and you do blow it out well, that happens. You can certainly live to trade another day and survive and come up with some more money. You start off with a quarter million dollars or half a million dollars or a million dollars, your entire life savings. And if you lose that, Ooh, you're toast. Like psychologically is a hard to fix those traders and I've done it.

I've had some that I've worked with that have blown out a big trading account like that. And we've been able to get them back on track, but that's a big challenge, but here's the thing that I want you to walk away with. I'm kind of diverging a little bit here. Uh, I want you to walk away with this reality. In fact, I'm gonna put it full screen so you can see it. There is no reason that any traders should ever go broke except for bad risk management. And the key here is you gotta know when to fold them. You got to know when it's time to pack it up and say, you know what, I'm going to take this loss. And I will let some of these small losses stack up, but I'm going to hold for the bigger gains. And when you learn that little secret right there, that little piece of risk management who everything can turn, uh, I'm, I'm fascinated.

You know, I've taught now hundreds of thousands of people, well, probably not hundreds of thousands, but over a hundred thousand people. Um, and I'm fascinated, you know, I do my trade setups on Sunday nights and I've been doing that for years publicly where people can watch and, you know, people will write in and they're like, well, I can't believe, you know, only six of your trades made a profit and four of them, they were, they were big mess ups. And you know, I lost a lot of money on that. And it's like, well, first of all, I didn't tell you to place a trade. I'm just telling you what I'm doing. So that's the first thing. Uh, secondly, you know, look at the winners. When you look at the winners, you know, my winners will consistently far out run the losing trades. And because of that, what ends up happening is my account continues to grow.

I'm not a perfect trader. Nobody's a perfect trader. Nobody's gonna be placed in 10, 10 out of 10 trades, every trade over and over. Now, if I have a good season where I do a really good run of 10 trades back to back or 15 trades back to back, I guarantee you I'm going to get hit really, really hard. In fact, last summer from when I'm recording this last summer, I had one of those seasons where I had about three months back to back where it was just like, man, everything I hit was just hitting big. I had huge account growth. And then in one day, boom, I had a huge blow up and I lost a big part of that game. But if I look back, if I step back, remember we talked about, you know, not losing perspective and scaling out. You look back.

And man, I had a huge growth and that over that year I actually had over 180% total account growth for that one year of trading. Now, if I got really focused on what happened in those three trading days in September, I'd be like, Oh my gosh, I'm a horrible trader. And that's where most people are. But you know what? It comes down to this principle right here, know when to hold them, know when to fold them, let your profits run and let them run big and keep your losses to a minimum. You can take lots and lots and lots and lots of losses. If you will let your profits run really big. And that's one of the biggest keys to being an effective trader. So my secret number six know when to fold them.

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