Don’t lose money, is a Warren Buffett motto.
The sentiment applies to all investments, but as a financial trader, I need to be clear in my mind what this message means.
My goals are: (1) protect the account, (2) make some money, (3) make a lot of money.
As with any business, and unlike investing, to trade necessitates taking losses. It’s part and parcel of doing business.
Protect the account
Protect the account (or don’t lose money) means to follow the rules. Such rules have to be agreed, understood and written down. Determining trade guidance at the point of or during a trade’s activation is unacceptable.
If you glance at my trading plan, you will notice that the rules are not complicated or excessive—however, they are necessary.
For instance, before taking a trade and as part of my strategy I need to be sure that a potential reward is at least equal to my initial risk; and I need to trade at a size that if lost will not break my 5% weekly rule. The list goes on.
As an intraday trader (which means I mostly day trade but now and again trades will be held overnight) trading is relaxed, but at the moment of a trades activation, it can all happen in moments.
If I break a rule, it is classified as a mistake and needs to be brought out in debrief and corrected—irrespective of whether the outcome was positive.
Protect the account does not mean to be tentative with a trade or take profits too early. It means don’t make mistakes—don’t break the rules.
Make some money
If my rules work, and I don’t break them, and my methodology is sound, after one hundred trades (about 30 days) I am sure that I will make some money.
And that is the bedrock of it all—doing the same thing well over and over without mistakes. If I do that (we) will profit.
Make a lot of money
Albert Einstein famously said that compound interest is the most (potent) force in the universe.
How to make a lot of money is compound the trade amount. I do this at the start of each week. I adjust my risk/reward percentage to reflect the account size. (Note: if not an expert then a monthly adjustment is more appropriate).
If I follow my first and second goal, then the third (the real purpose of it all) will happen.