I took my wife and kids bowling recently. Now, this was easily the first time I've hit the lanes in over five years – and I thought I had a good score going…
Until something weird happened. Really weird.
It was so strange, in fact, I’d bet you wouldn’t believe me if I just told you.
But I’ve got proof – photographic evidence - that it actually happened. I’ll show you in a minute.
I think you’ll agree it’s pretty cool - or at least that it is weird.
So… let’s take a look at this oddball frame of bowling. And when we’re done with that, I’m going to tell you why this freak occurrence can make you a better, wealthier investor.
Let’s go…
My Bowling Move Drew a Big Crowd
If you bowl pretty often, you know a 7-10 split – what pro bowlers would call a “goalpost” or “bedpost” - can happen.
But what I got, instead, was almost like what they’d call a “Christmas tree,” but with a big difference: Instead of staying put, a front pin (I’m not sure exactly which) slid back between the middle of the seventh and 10th pins.
I don’t know what the pros would call this, but I decided to call it a “7 - 8.5 - 10 split.”
It was so strange, I pulled out my phone and took a snapshot. It looked like this:
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Now, I'd never seen this before, and judging by the number of people stopping to see what happened, I'd venture no one else at the bowling alley that day had either.
It would’ve been nice to leave it there like that, with the odd pin positions “memorialized,” you might say, but there were still a couple of frames left to play.
And even though I knew that there was virtually no chance of picking up this spare and bumping my score higher, I picked up my ball and gave it a go anyway.
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Although this unexpected situation could've had some real negative impact on my score, it didn't actually wipe out my game entirely. I bowled through the next few frames to finish, and I ended up with a 160 overall.
So, I didn’t exactly set the world on fire or give Jeff “The Dude” Lebowski a run for his money, but I think a 160 is pretty good for not having bowled in five years.
So, what the heck does my triumphant return to amateur bowling have to do with trading and investing?
Turns out, quite a lot…
How to Live to Trade Another Day
For me, even though I had one really bad frame, I had to realize – and accept – that it was just that: one bad frame. It wasn't the end of the game, and I still had a couple more opportunities to come back, "redeem," and get some points.
Trading and investing isn’t a bit different.
Think back to one of the “Oracle of Omaha’s” rare investing missteps, back in 2016, when he took a $2.6 billion loss on International Business Machines Corp. (NYSE: IBM).
We all get bad trading days – “unfavorable pin positions” - from time to time. It’s part of the game.
Just like bowling, there are times when we'll get a bad trade and will even take a loss. But so long as you haven't bet your entire portfolio on that one trade – and so long as you don't take that one trade all the way to zero – you will always have another opportunity coming your way.
The trick is knowing how much capital you should apply to any one trade.
There’s a simple rule I use for doing that.
Here's the "Magic Number" for Applying Capital
2% of your money is absolutely the way to go.
Here’s what I mean:
In a hypothetical account of $25,000, you should never risk more than 2% (or $500) on any one trade.
That’s one of the reasons why, in my paid trading research services Money Calendar Pro and Weekly Money Call, I never recommend a trade that costs more than $500 to make. We’ve had 75 double- and triple-digit wins, including partial closeouts and open positions, in 2017.
If you risk that 2%, or $500, and double it, then of course that works out to be about a 2% gain to the account. This can vary based on how many successful trades versus unsuccessful trades you've had…
But let's run with a 2% return on average per month – an entirely realistic, attainable goal.
Say you want to make $2,000 every month. The first thing you need to do – before placing any trade at all – is calculate and determine exactly how much you need in your account to achieve that goal. That comes out to about $1,000,000, which means you'll need to have at least that amount in your account to increase the probability of bringing in that $2,000 every month.
Now, one way to generate more capital is to alter your risk-to-reward goal. If you go for a 3:1 reward-to-risk ratio, then you'll want to shoot for your winning trades to be three times greater than your losses (example: try to earn $300 on a profitable trade by only risking – or stopping out – with a $100 loss).
With a 1:1 reward-to-risk ratio, your trading needs to be better than 50-50, meaning you need to win more than 50% of the time so long as you are keeping the risk the same (the $500 cost per trade if you risk 100%, or $1,000 cost per trade if you are using a 50% stop loss).
The 3:1 reward-to-risk ratio gets a little tricky in that you may take losses quicker – and maybe more of them – but when your trades work, they do so three times greater than a loss. In a sense, you could say that one profit erases three losses (and at worst breaks even).
A larger reward-to-risk ratio also gives you the chance at being profitable at a less than 50% win rate. So even if you have one of those unexpected moments – like my 7-8.5-10 bowling split – you can still survive and continue to trade.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.