Total trading control depends on this...

The greatest fully audited public investment record is that of Peter Lynch. He managed to make 29% per annum for 13 years before retiring. Stanley Drukenmiller managed to generate about 30% per year in his hedge fund until he converted into a family office. George Soros did about the same, but both men ran their money in private hedge funds so the records are not fully public. Warren Buffett has been able to generate about 20% returns for decades - a feat that made him one of the richest men on earth.

The point is that if you are trading, making 20% per year is good. Really good. I know that Youtube gurus will tell you that 20% per month is totally possible - but if that were true, they would be on the cover of Forbes, not Mr. Buffett.

So if 20% is the benchmark goal, then everything you’ve learned about risk is probably wrong.

20% is equal to 2000 bps (or basis points). Almost every retail trader is familiar with the idea of pips, but far fewer traders understand the notion of bps which is a much more important concept.  A bps is a basis point which is 1/100th of one per cent. It is the fundamental building block of trading profits, much like atoms are the building blocks of Newtonian physics.

Every professional prop desk or hedge fund operation measures their daily and monthly returns in bps, trying to grind out small profits every day that build up over time into a 20% annual return. 2000 bps over a 250-day trading year breaks down to just 8bps per day.

I once described my trading approach as doing 100 trades to make 1% and a gentleman in the crowd responded that he couldn't imagine a worse torture.  I agree because I too, would not want to make 100 trades just to earn 1%.

But fortunately, I don’t have to.

These days all retail traders have powerful software robots at their beck and call, and I have mine. And while I couldn’t conceive of personally doing 25 trades each day, watching every tick for 23 hours straight, my robot has no problem doing so.

But the robot is just a mechanical solution to the problem. The real trick to risk is frequency. This is something few retail traders understand. The more you trade, the smaller your bet must be. The generic piece of advice on the Internet is that you shouldn’t risk more than 1% per trade. But that’s only true if you make 10 or 20 trades per year. If you make ten trades per day 1% bets is a guaranteed road to ruin.  You will probably lose 30% of your account in the first month of trading. In fact that is exactly how many traders blow out their accounts - not from a single bad trade - but from a series of losses that quickly decimate the equity.

If you are trading 100 times per week - which many margin-based retail trades often do - then losing ten trades in a row is almost a certainty. And that’s why trading size must be measured in bps not pips. You can make 10 pips or 100 on a trade - it’s irrelevant. The real question is how bps did you risk?

Risking a bps to make a bps is not glamorous. It’s not sexy, but that’s how winning is done. The biggest market maker in the world is Citadel Securities. Want to know the average size of their trade? 

100 shares.

So if you want to maintain total control over your account, consider doing the same.