Trading Simply: Minimizing Losses
by John Sweeney
Richard Dennis is said to have said, "There's a lot less to trading than meets the eye." If so, he was
correct. I like to describe an approach that has nothing to do with entry or exit, but everything to do with
minimizing losses. I believe virtually any system that can identify successful trades can be profitable,
given good loss control. Here's how.
Approach trading, particularly futures trading, as a zero-sum game. In such a game you can only win if
someone else loses. Stock trading is not such a game, definitively, since its total value can rise and fall.
However, I see no reason that rules sharpened in the harsher regime of futures wouldn't serve well in
stocks. (Idea: what to make of instruments such as index futures, which are traded in zero-sum markets
but derive from non zero-sum markets?) Thus, as a practical matter:
Rule 1: The theoretical solution to a zero-sum game is to minimize the size of. your largest loss. Every
trader has heard that adage before: Cut your losses.
Rule 2: Trade a small percentage of capital for any one position, preferably 2% or less. I don't know a
serious trader who commits more than 5% of his capital in any one position, and most are around 3% .
I've had people ask me what their returns will be if they commit 10-15% of their capital to their positions!
Their return would be a wipeout, because the probability of ruin is very high and very quick—say, three
Now, to keep the loss in proper proportion to capital without being stopped out of positions, you need a
technique for estimating the size of the losses you'll take. I'll show you how to estimate this precisely, but
first, one more general rule: