The other day I saw the below tweet from fellow trader @LTentarelli
Before you dismiss that tweet as crazy, let me introduce you to Peter Brandt:
Peter Brandt has an audited performance of 42% per year over 29 years. During this time he had only 3 losing years and his worst year was -8%. On top of this, his win rate was only 40%.
Peter Brandt has said that if you took the other side of every one of his trades – with proper risk management and position sizing – you would have outperformed him. Think about that for a moment: this guy achieved 42% per year over 29 years and he is saying that if you went long a position every time he went short and you went short a position every time he went long, as long as you had proper position sizing and risk management, you would have outperformed him. Makes sense right? I mean, only 40% of his picks were winners; that leaves 60% winners for those that took the other side.
But how is this possible? The answer lies in @LTentarelli’s tweet.
If you want to succeed in markets, the most important thing to learn is how to size your positions and how to manage risk. Peter Brandt only risked 1/4% of his overall portfolio on most of his trades. In other words, if Brandt was trading a portfolio with an overall value of $100,000, he would risk no more than $250 on each trade. This allowed him to keep his losses very small. Since he kept his losses small, he didn’t need a big win rate (winning percentage) to make money. When you keep your losses really small, it’s easier for your winners to cover those losses and lead you to profits.
Most traders spend significant time obsessing over indicators, patterns, and set-ups when they really should be focusing on how to properly size positions to ensure they don’t need a huge winning percentage to be profitable. The real skill lies in the Risk Management.