Your trading system is a bucket.
And the water you bring home from the stream is your profits.
And the different streams are the different markets, strategies and setups that you can learn.
If your bucket has holes in it that you don't know about or that you choose to ignore, much of the water will
leak out by the time you reach home.
But your needs and desires are greater than the amount of water you can bring home with your bucket. What are the first things that come to mind when solving this problem?
1) Take more trips with your bucket (More trades = more profit)
2) Make an even bigger version of your bucket (2X position = 2X profit)
3) Go visit other streams with your bucket (Learn to long, learn to short, try OTCs, listed, options, futures, etc.)
You try each of these strategies to increase your profits, and you succeed for a while. But under the strain of the extra trips and the heavier load, and in traversing the unfamiliar path toward a new stream, you add stress to your body and mind. And water continues to leak out of your bucket.
Under this physical and mental stress, you start to stumble on rocks and potholes in the road. More water spills out of the bucket because of your unbalanced body and mind, and in desperation you start to push even more trips and even bigger buckets to get back the water you lost.
Until it all becomes too much and you collapse from the strain. Body and mind broken from the effort and from thirst.
This is what happens when we take a revenue maximization approach to trading. We take on more trades and bigger positions and add new strategies in order to do more and earn more.
But in doing so, we also magnify the effect of all the unrepaired leaks in our bucket. We try and we try but we can't out-earn our losses. And the added risk means increased chances of blowing up.
Before scaling up your position size and taking on new strategies, better to take a loss prevention approach by sealing up all the big and small leaks in your bucket. You can never eliminate all losses, but you can reduce and eliminate the big unnecessary ones.
I have noticed that I could earn 2-3X more in the stock market just by preventing big unnecessary losses on trades that I'm not even supposed to take. This simple change would be much more profitable than trying to take on more trades and setups, or by increasing position size.
Going forward, we have to identify the leaks in our bucket and seal them up first. That will give the biggest effect on how much profit you bring home from the stream. Don't try to compensate for your leaks by trading more or trading bigger.
For me, that means completely eliminating setups and situations that regularly result in me taking a relatively small number of losses but which represent a big proportion of my total losses on the month. I believe I could double or triple my monthly P/L by fixing up this one leak.
Have you fallen into this trap of trying to compensate for your leaks by trading more and trading bigger?
What are the biggest leaks that you want to eliminate from your trading game?
I love your blog posts, very nicely written and helpful!
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preventing big unnecessary losses im not even supposed to take.
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