You’ve got to start the opposite of what most people do. We want to ensure that we can keep trading no matter what happens. None of our trades should be able to hurt us. Therefore, if one of my trades goes terribly, it shouldn’t hurt me. I should live to trade another day, no problem at all.
Most people don’t understand the impact of losing money. Although you’ve got a hundred dollars to invest and lose 50% of it, you now have $50. Thus, you must make a hundred percent return on your $50 to return to where you were. Then you lost 50%, but now you’ve got to make a hundred percent to get back to break even. However, making a hundred percent is not easy, and if you lose more than 50%, like, let’s say, you lose 90% of your money, now you’ve got to make 900% to get back a hundred down to 10. Then from 10, you’ve got to get back to a hundred. But in any case, it’s a lot harder to recover.
You become much more focused on managing the risk as soon as you realise that. The sad reality is most traders blow up several accounts, as in losing the entire account before they even learn how to trade. Nevertheless, staying in the game is the most important thing because if you make a hundred percent this year but lose a hundred percent next year, you still end up with nothing. Thus, staying in the game is most of the battle, but most people can’t even do that because they risk too much.
Therefore you can preserve capital by risking a lot less, and a lot less means if you are wrong on a trade, you should lose less than 1% of your account on that trade.
That was number five, preserve precious capital, don’t blow up your account, and stay in the game.