The impact of large winners on your trading results

So let's talk about, you know, power law and winning streaks.

I know, I know many of you might be trading one particular ticker, uh, long or short on any given day.

That's what you do.

Um, there's great opportunity cost in that obviously, because if you think about it, you know, it is possible for markets to trend, but most of the time they're not.

So if you're trying to kinda dumb it down to, you know, one-minute bars or 30-second bars, whatever it might be, you're turning trading into a, a working, a working-class job.

And I don't wanna s-- I wanna think-- I want you to think like a business owner, not a business manager.

And so what happens is if you limit your scope, 'cause most of the time you can use the same entry criteria position sizing across any number of instruments, and if it's the same dollar of risk, what do you care? You see? So when I see people saying like, "I just trade the MNQ," or, "I just trade the ES," to me that's a fear-based strategy, 'cause there's so much other opportunity out there and oppor-opportunity cost is a real, is a real cost to your performance.

Now, maybe that's appropriate for your budget, maybe it's appropriate for, you know, what you think is your style of trading, but how are you gonna know? Two, the indices have high correlation, and when markets get stressed, those correlations grow.

So that all becomes one big trade.

So, you know, you can normally s- do the study, go to Claude and see, okay, if you're looking at DIA, SPY, QQQ, IWN, you know, look at that.

Maybe you're short TLT, you know, against it, I don't know.

But I want you to think about expanding your horizons.

The reason why, and again, this comes from our, our, you know, our deep dives that we do at Portfolio Accelerator, um, is that when you, when you think about where your returns come from, there might only be three or four names in your portfolio that make you almost all of your money, net net of what your losers are.

Or, and by losers I mean things that kinda move but don't move enough, so they're kinda used to offset the, the smaller losses that you're consistently taking across all of your trading.

Right? You look at the distribution of the bell curve, right? You, you wanna kinda skew that as much as you can to the right and take larger gains.

So that means, you know, buying things, hanging on to your winners longer, reinvesting some of your gains into a protective stop, and for some of you, maybe even adding to your winners.

This way you're letting the market do the majority of the work.

And you could always position size it to a point where it's appropriate rather than saying, "I need to trade this particular size during the day, and if I can't do that then I can't trade it." Whereas if you took something that was maybe a tenth or a quarter of position, uh, of that size, you'd be able to withstand the risk, which is not necessarily scary and not, nor is it reckless of, you know, taking it home overnight.

And we, we, we looked at a bunch of studies, I don't have them handy, about how people did and looked at, you know, where their gains came from, and it was largely found that it, it came down to this power law where you have, you know, a significant part, maybe 80% of your gains are gonna come from a handful of names that work over the course of the year.

And the more you can let that money work for you, the better off you're gonna be financially, if your goal is to actually make money.

If your goal is to sit there in front of the screen all day and grind, that's a different type of a goal.

So, you know, I'm not calling your girlfriend ugly, I'm just saying take a look at, at expanding your horizons out there, 'cause there are names that have been moving that you know you can have a position on.

It doesn't require a lot of work, and it doesn't mean for a second that you're any less of a trader because you're less active.

You see what I'm saying? And I get a lot of questions from people who are frustrated, and the reason is, is that when I-- when they tell me what they're doing is they're trying to find like the shortest timeframe possible to trade where there's the, the greatest amount of randomness.

They're struggling.