The secret to optimising your chances of a good return as a trader is to get out of losing trades and keep your losses small.
Sanlam Private Wealth Portfolio Manager Nick Kunze said top traders achieve ridiculous returns that no long-term investor can match.
Speaking to Garth Mackenzie on the Talking with Traders podcast, Kunze said long-term investors achieve more sustainable returns.
However, a small group of successful traders who trade with their own money blow all long-term investors out of the water.
“In general, long-term investing is definitely better. However, a small percentage of good traders achieve returns no long-term investor will ever come close to,” he said.
Kunze added that trading comes with significantly more risk than long-term investing and that many traders lose money.
IG Markets, an online trading provider with 290,000 active traders, states that 77% of retail investor accounts lose money.
“The majority of people trading with their own money make losses, especially with geared products like CFDs,” he said.
Mackenzie equated it to golf, where only the elite players can make a good living from playing the sport.
Speaking about the risks associated with leveraged products, he said he had seen clients who had made a fortune in a bull market get whipped out when the market turned.
“It comes back to a lack of respect for risk management and proper position sizing,” Mackenzie said.
What top traders do differently
Kunze said a big lesson came from his former boss, who said everyone makes mistakes. However, “if you stay wrong, you will be fired.”
“If you make a trading mistake, get out of the trade and move on,” he said.
“The guys who make money trading are unemotional and brutal when it comes to a losing trade. They don’t even bat an eyelid when they get out of it,” he said.
If you are a trader with gearing and start getting margin calls, it is an alarm bell that you are wrong and should get out of the trade.
Mackenzie added that you could make money as a trader with a hit rate of less than 40% or even 30%.
The key is to get out when you are wrong, lose as little as possible on losing trades, and make as much as possible on winning trades.
Kunze advised traders to use online systems with automated rules to avoid mistakes because of emotional weaknesses.
He added that you must ensure that you have enough capital to withstand the ups and downs.
Another important factor is risk management. “You don’t trade the market. You trade risk,” he said.
“You want to be in it for the long term and make as much money as possible. The only way to do it is to manage your risk,” he said.