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This is another very important lesson I want to share with you. What is it about? Well, in trading, you can be either aggressive or conservative. As an aggressive trader you risk a lot to gain (“No pain, no gain”, right?). In fact, most really great and above the average returns in markets are usually achieved by high risk taking. On the other hand, as a very aggressive trader, you can lose everything too – which happens quite often (I’m up-to-date with that because I know plenty of aggressive traders). Contrary to that, a conservative trader is happy with a lower return, but wants to be always sure that his account will be still there in the next years and that he’ll be able to support his living cost and other activities (in my case, insane traveling) by trading incomes for a long time, even during times when markets are challenging.

I have to admit that one of the (very few) things that I’ve done right since the very beginning is that I´ve always been a more conservative trader rather than an aggressive one, but have a tolerance for a reasonable level of high risk. Some traders are way too conservative and risk even too little for fear that they could lose money. That isn’t a good approach either. I’m somewhere in the middle, which doesn’t mean, at all, that I’m either an aggressive or a too conservative trader. From that “middle point” I’m leaning slightly more towards the conservative approach, which I´ve learned it’s a very good one. Why?

It´s simple. Being for over a decade in markets, I’ve experienced a lot – including crazy market movements, serious financial crisis, bursts of bubbles, unexpected market shocks, etc. During all those challenging times, I’ve witnessed many great traders wiping out their accounts completely and getting out of the business forever, just because they had a tendency to be too aggressive towards their trading and position sizing. Although they usually made a superior return during the good years, sometimes even in very high percentage terms (over a hundred per cent), their aggressive style related to aggressive risk exposure simply couldn’t survive the bad times.

Most beginners are way too aggressive. They risk it all in blind faith that they’ll get rich fast. They never admit the possibility that they could lose all their money, but yet this is the most regular and probable scenario.

On top of that, an average newbie in markets normally thinks that he can withstand a bigger drawdown than in reality he can't. During my trading career I´ve met hundreds and hundreds of beginner traders, and the story with them was often the same: they didn’t think that they would have a problem withstanding a 50% drawdown (in the belief that it would bring them a superior return) but when they got into as low a drawdown as 10% with their real money, they started panicking, got depressed, experienced short-term shock, or needed a few months to recover mentally. Seriously!

If you are too greedy and focus only on the side of the returns, you’ll be in serious trouble. Therefore, my rule from the very beginning has always been not to risk more than 25% of my account. I use Monte Carlo analysis to calculate the worst probable drawdown of my portfolio and I always tweak my portfolios in such a way as to be sure that I’m not overtrading or being too overexposed with my positions and number of traded contracts. 25-30% drawdown keeps me comfortable. I know I can survive it mentally without starting making stupid mistakes under pressure and mostly, I know that this risk level will still allow me to be here for many years to come. Of course, If I were willing to risk 50% instead, I’d be very likely to make twice that money (the return is always relative to the risk), but I also like sleeping well and travel without unnecessary discomfort. So, get rather conservative too. Remember, shit does really happen (I took this photo in Sydney on my recent cruise around the world).

Happy Trading!


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