The First Rule of Successful Trading

by Darrin Donnelly on March 29, 2011

Rule No. 1 for Traders

Rule No. 1 for Traders

We’ve all heard the often-repeated sports maxim, “The best offense is a great defense.”

It’s true in sports and it’s true in trading.  But cute maxims often lose their meaning and purpose if we don’t examine them more closely and make sure we understand the principles they explain.

As traders, what are we really saying when we repeat this advice? 

This “defense first” philosophy is simply a reminder that while most losing traders put the vast majority of their time and energy into maximizing their profit on a trade, the most successful traders focus first and foremost on minimizing their loss on a trade.

What’s very interesting about this focus on minimizing losses is that it’s the foundation of investment success regardless of your trading strategy.  It’s billionaire trend trader Paul Tudor Jones’ number one objective and it’s also billionaire value investor Warren Buffett’s famous “Rule Number 1.”

This is no accident.  Protecting losses first and worrying about gains later is THE universal foundation for a successful trading strategy.

Now, don’t take this to mean that maximizing your gains isn’t extremely important.  It absolutely is!  Novice traders are FAR too likely to make the mistake of selling too quickly instead of riding a valid trend the whole way through (leaving fortunes behind).

But the point to remember is that your FIRST objective needs to be minimizing losses.

Great coaches know you need to develop a great defense before you go to work on designing your offense.

Great traders know this as well.

We can sum up this pearl of trading wisdom with a great quote from Geoff Morgan, one of the top-performing professional traders featured in the excellent new book, The Universal Principles of Successful Trading:

“Before you can start winning, you must stop losing.”

 

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