When it comes to trading, a lot of people believe that the most important skill you can get is making more money, when in reality (according to more experienced traders) it is not losing what you already have. After all, even Warren Buffett, the world’s third richest man and an investment icon, believes that your #1 rule as a trader is to never lose money.
This article is the collection of 8 quotes by renowned investors that might help you better understand the nature of financial risks and manage your losses. This knowledge is important as it could help you stay in the game when everything seems to be against you (because, as you know, you could lose all of your money and your trading would suddenly end).
“I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.”
— Paul Tudor Jones
“The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.”
— Ed Seykota
“You have to learn how to lose; it is more important than learning how to win.”
— Mark Weinstein
“I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.”
— Bill Lipschutz
“Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.”
— Larry Hite
“Letting losses run is the most serious mistake made by most investors.”
— William O’Neil
“When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well… If you stick around when the market is severely against you, sooner or later they are going to carry you out.”
— Randy McKay
“When I became a winner, I said, ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.”
— Marty Schwartz
The quotes above may seem intimidating, yet it is important to grasp the concept of risk management and put it into good use. When a bunch of highly professional and successful traders emphasize the importance of risk management, they probably mean it. How to follow these principles on a more practical level? You could for example allocate no more than 2% of your entire trading capital to a single deal and close loss-making deals.