March, 31st 2018
“Good investors don’t win more; they’re just better at keeping what they win.”
This has been the simplest piece of advice that we have ever come across but also the hardest to follow – the idea that effective risk management is the key to staying rich.
Becoming rich is arguably not the hard part, it’s the staying rich that is difficult.
There are three steps to remember:
- Know your target– our previous article on deciding ‘how much is enough’, breaks the myth that you need a lot of money to be financially free and secure, which goes onto our next point.
- Reach your target sustainably– with less money needed, this should put less pressure on you to seek unsustainable ways to invest. This doesn’t mean you shouldn’t put your money into high-risk investment vehicles that produce a high reward. It’s suggesting that you should be aware of managing that risk, which goes onto our final point.
- Limit your greed and keep your profits– it’s not real cash until you close your position and withdraw. Otherwise it’s still just a number on a screen. Don’t worry about missing out on any potential for larger gains – that’s what targets are for. Remember “good investors don’t win more; they’re just better at keeping what they win.”
This couldn’t be more familiar to us in our journey with investing and trading. We’ve had our fair share of moments where we regretted not following those three steps above. By not limiting our greed we ended up making less money than we could have, had we decided to respect our targets. But where we did follow our own guidelines, we weren’t only financially rewarded, we also felt emotionally at peace.
For a very long time, we couldn’t accept that we were ‘greedy’. It felt like a criticism. So, the first thing for us was to accept that greed was the most important reason for our previous failures. The second thing was to realise that greed is a normal emotion that everybody has. If you haven’t been greedy so far and if you think you aren’t greedy, just start trading and see how greedy you really are.
This is normal.
Everybody likes to work less and make more.
Everybody likes to become a multi-millionaire or multi-billionaire within the shortest time but the problem is this strong desire can not only prevent you from getting rich, but it doesn’t even let you become a profitable investor who is able to make a steady small income every month. As we described in our previous article, start small with ‘enough’, then get bigger and bigger.
The third and most crucial thing for us to do was to learn how to control greed. The problem with greed is that it covers your eyes and doesn’t let you see the bigger picture.
You think, to become rich, you should have a $100,000 account and double it every month and as you can’t afford to have such an account, you try to double or triple your $5,000 account every week to reach that level but you wipe out your account every month.
This is your greed that doesn’t let you sit and calculate and see how much money you could make if you just would be patient and happy with a small amount of profit every month and what account size you would need to become rich in a short time.
If you start with $50,000 and make only 5% per month, after two years you will have a $161,255 account and a monthly profit of $8,063. A yearly income of $96,756 is pretty good. In fact, it’s higher than the average salary in the United States. Besides, you can still leave some of the monthly profit in your account to grow it even bigger.
Then you will have more monthly profit.
What we are trying to say is that a small but steady monthly profit can create a great income for you after a while. But if you follow your greed, you will do nothing but lose your money time after time.
Here are some guidelines when it comes to limiting your greed:
- Don’t over-trade– there is no need to trade every day. Focus on getting 1-2 trades right per month.
- Don’t take positions when there is no strong and sharp signal– follow your strategy and your targets.
- Don’t take the position while it is too late– you should wait for another trade setup. There are many opportunities to enter a good setup so don’t ever feel impatient or regretful at any missed chances. Remember all you need is 5% per month.
- Don’t take too much risk and trade more than 2 – 4% of your account– stay in the game.
- Don’t let losses run– make sure you set stop losses worth less than 10% of your total account size. Again, stay in the game.
- Don’t switch strategies or increase targets halfway– strategies and targets take away the emotional nervousness that comes about with trading. Setting a target that is too high increases the chances of you getting upset when you don’t achieve it.
And here are three key tricks to not make investing a really really unpleasant activity very quickly:
- Do develop a habit of saving from your primary income. Don’t make trading your only way out of the rat race. Don’t turn it into a second day job by putting the daunting expectations on yourself that if done right it will allow you to purchase your first home by December without any other hope in sight.
- Think in real terms about how much you’ve got sitting in your investing account at the peak of the unreleased profits. Now put this is in relation to your regular annual savings. Say, if very frugal you can save £20,000 pounds a year from grafting. But your crypto portoflio jumped to £37,000 from a £2,000 initial investment. But you feel greedy and your mate made a lot more. Wrong way of thinking. All it is…you are ahead
- Race against yourself a.k.a. don’t compare yourself to others, only to your original situation. The only way you should measure your personal finances is by benchmarking your original situation a year ago to where you are today.
How many times have we all heard the classic cliché where the Tortoise wins the slow and steady race vs. the Hare. Be the Tortoise – know your target, reach it sustainably, and limit your greed and take profits. Limiting your greed can make you more money.
Of course, if you are interested in hearing more about our trading setups or just want to know more about our experiences, please feel free to reach out to us. We’ll be happy to share.
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