Interview, Fireside Chat, Podcast
How a 50-Year Veteran Thinks About Risk Management · Peter Brandt
- Expects the next trade to be a loser to maintain risk management discipline.
- Advises aspiring traders to keep a day job, predicting it is highly unlikely a novice can turn $10,000 into $1,000,000 in one year and sustain it.
- Plans that quitting a day job requires opening a trading account with at least $100,000 in proven profits and an additional $100,000 in a separate bank account for family expenses.
- Predicts 80% of traders chasing 70% to 80% win rates live in a "dream world," noting professional win rates typically hover around 50% plus or minus 6% to 7%.
- States statistically, only 3 out of 10 people with three years of prior experience achieve a 30% annual average over five years with only one losing year.
- Predicts the probability of a trader doing well for three years achieving a 30% annual average for the next five years with one losing year is 5 in 1,000.
- Claims only 1 in 100,000 people will achieve "Market Wizard" status defined as exceptional consistency.
- Expects novices to make nearly all their time searching for entries, describing this as a significant mistake.
- Predicts 15% of trades produce 85% of total profits, requiring the remaining 85% of trades to break even.
- Warns that 80% of traders preferring a 70% win-rate system over a 30% system lack proper risk management and fail during random subgroups where they may lose 10 straight trades.
- Predicts trades easy to execute due to social media agreement are generally losers, while trades harder to execute against public opinion are more likely to be big winners.
- States novices risking 5% to 10% of capital per face a guaranteed market exit, and traders risking too much will inevitably lose 30% of capital.
- Aims to limit asset volatility drawdowns to less than 1% annually, though acknowledging 2% to 3% drawdowns may occur.
- Plans to enter trades fully (100% position) rather than pyramiding, viewing pyramiding as dangerous for raising average entry prices or adding to losers.
- Expects to exit partial profits within a week or two if a trade is profitable to increase staying power in the remaining portion.
- Predicts that traders who do not own their approach and trade like others will likely fail.
- Expects optimization of trading rules to be a myth because markets change personality, rendering past data ineffective for future conditions.
- States a trader must follow exact rules for at least 200 to 300 trades to determine if they have an edge.
- Predicts chart patterns were more reliable in the 1980s due to less efficient markets compared to today.
- Notes high-frequency trading impacts day traders more than position traders like himself.
- Expects a novice has a very small chance of making money in the first three to five years, viewing this period as an apprentice phase.
- Predicts a trader running $10,000 into $1,000,000 in three years is one in 100,000.
- States expecting 100% annual returns will only cause trouble and cost the account.
- Predicts traders focusing on making money as the primary motive rather than the craft will likely be unsuccessful.
- Expects traders need to protect capital for the next three years to survive the apprentice period.
- Sets a target average loss of 17 basis points (0.17%), warning that losses of 5% to 10% will blow out accounts.
- Predicts traders who assume they will not lose money are ignoring a "graveyard stone" waiting for them.
- Expects money will come as a byproduct of becoming excellent at the craft rather than being the primary motive.
- Predicts traders approaching 80 who swing for the fences risk losing significant capital they cannot recover.
- States without following rules, traders will miss rare, two-standard-deviation events, such as a $60 move in silver.
- Predicts the only way trading math works is through small losses and periodic large gains.
- Warns that the temptation to take quick profits on every trade prevents experiencing periodic large gains required for profitability.
- Advises future traders to be patient, learn from mistakes, avoid taking small profits, and not watch screens during the day.
- Plans to post charts of interest to show patterns traded but does not plan to make specific trade recommendations.