Ever heard of the 90 x 90 Loser Rule? It says that 90% of traders will lose their risk capital within their first 90days of trading.
Having been in trading the markets for 25+ years and mentoring over hundreds of traders, I can attest to that. The average fluctuates pretty close to the 90 x 90 Loser Rule, especially for the absolute newbie.
But there are steps you can take to increase your odds of being the 10%.
As a trader (and even an investor), I think the most important skill is to learn to manage your wealth. Over the years, I’ve compiled seven rules that’ll help any aspiring trader (and investor) to manage their wealth.
They are:
1 – You don’t get rich overnight through investing
Look, the stock market isn’t a get rich quick scheme. There just isn’t a sustainable strategy that will make you rich overnight.
You can choose to invest in value stocks, growth stocks, high yield stocks, but whatever you choose, there’s no get-rich-quick stocks. Stop looking.
Instead, investing is a skill, a life skill.
You should learn it and become an independent investor.
“A man must believe in himself and his judgement if he expects to make a living at this game. that is why I don’t believe in tips.”
Jesse Livermore
2 – Start Small
Develop your investing skill while keeping your investing tuition cost low.
Know that you’ll make mistakes and experience losses in the markets, it’s a journey that every trader or investor will go through. Heck, even pros don’t get it right 100% of the time.
When you are new, start as small as possible and cut loss as fast as possible.
Once you have a tried and tested or a backtested strategy, you can start scaling up. At this stage, it’s time to learn to manage your risk. (but that’s another lesson for another day)
3 – Don’t invest in something you don’t understand
To do well as a trader, you’ll need to have a hunger for information and the ability to understand how that information will affect certain stocks.
That said, you’ll never have all the information you’ll ever need to make a decision. But you have to do enough to give you the confidence and advantage in the market.
For example, I made about $100K trading the Hong Kong Stock Exchange recently when the White House tighten regulations on Chinese companies listed in the US stock exchange.
This move forced a handful of big Chinese companies like JD.com and NetEase out of the US stock exchange and back into the Hong Kong Stock Exchange.
Realising that this trend would benefit the HKSE, I placed capital behind the stock and made about 30% return.
This ability to foresee potential market changes and detect trends will come with experience and a solid foundation in research.
4 – Don’t put all your eggs in one basket
It’s difficult to believe in diversification if you’re constantly looking at stories of investors making their pot of golds through stocks like Tesla and Zoom:
But these are just feel-good examples of successful stock investing.
But ask yourself;
How many of such stocks are there?
And how many are you confident in spotting them, and actually investing in them?
The fact is there are more stocks that perform the exact opposite as Tesla and Zoom. It’s a numbers game and unfortunately, you have a higher chance of investing in stocks that tank.
Hence, it’s safer to put your capital into a basket of good quality stocks, instead of just betting on 1.
5 – Don’t fight the trend
Let the trend be your friend, until it bends.
When the trend is going down, don’t tempt fate by aiming to buy at the bottom.
Instead, exercise patience, wait for the first sign of reversal before going in. Else, you’ll have a higher chance of catching a falling knife.
For example, the NASDAQ has been up for 11 years.
Throughout this period, there’s a group who stubbornly believe that bull runs last for 4 years and that a major correction is dawning on us. there will be a major correction. They put bets in anticipation of the ‘pending correction’.
However, this bull run lasted way longer because of all the ongoing fiscal stimulus. And the trend suggested its strength. Those who fought the trend, paid for it.
6 – Cut your losses early
I’ve said it above, but I’ll say it again;
When you are new, start as small as possible and cut loss as fast as possible.
If you are not sure when to cut loss, start managing your risk with a 1% cut loss rule.
Why?
If you are cutting loss at 1%, you can preserve your capital for a longer time.
Those with more experience and know what they are doing would cut their losses deeper, but know that they have their reasons for doing so. Most of them are taking an extra loss in order to confirm the trend.
Always find out how ‘gurus’ set their rules. These may not be the best for you, especially if you’re a newbie.
7 – When in doubt, don’t do it.
Be patient, keep your cash and go live your life.
Don’t be tempted by the markets or by other people’s successes. The markets are not a gambling den. If you are not sure where or what to invest in, don’t.
If you insist on investing and finding opportunities, go back to rule #1 and start from there.
Conclusion
I hope these 7 rules would be useful in your investing journey, or at least increase your odds of being in the 10% who won’t lose their capital in their first 90 days.
If you remain undaunted, I share how I draw up trade plans that help me make better decisions in the markets. Join in my next live session.