The Hidden Trade that is the Key To Long Term Success 🔑📈

Ask most traders what are the possible outcomes of a trade, and they will inevitably give you a binary answer: you either win or lose. But if we think about it for a second, there is actually a third choice. 🤔

If we go over our many trades, there are countless examples of trades that may have started out badly only to rally to breakeven and then ultimately fall apart. The art of NOT losing is perhaps the most under-appreciated skill in day trading. 🎨 It is, in fact, the foundational strategy of high probability businesses like insurance and casinos which is why EVEN is a trade. 🎰🏢

Insurance companies are, of course, notorious for eliminating any possibility of large payouts. They are in the business of collecting premiums, but the moment a client presents any type of collectible risk, they move swiftly to cancel the policy. The insurance companies, much like casinos, will make sure to rig the rules so that customers have virtually no chance of collecting a payout. 🚫💵

In Las Vegas, they will stop you from counting cards in blackjack ♠️♦️♣️♥️, and in Hartford, they will make sure to exclude all coverage of any malady you may already have. Now, we can all lament the evils of the insurance business, but it has a lot to teach us about trading.

There are really only two viable models of making money: the low-frequency, high-profit model where your wins are very few but are massively larger than your losses, and the high-frequency, high-probability model where the losses are very rare. 📊

We are all familiar with the fact that throughout the whole history of the stock market, all of the gains have come from only 20% of all publicly traded companies. 📉 Fully 80% of stocks are long-term losers. And even amongst the 20% of winners, it is only a handful of equities that are responsible for almost all the stock market returns. 📈💎

That's why index investing is so hard to beat. When you buy the index, you are essentially buying the whole lottery pot 🎟️ and betting that you will capture the few jackpots that will pay for all the losing tickets. 🏆 Little wonder then that the hedge funds have been getting killed looking for the diamonds in the rough amidst a pile of garbage.

But there are other actors in the market that actually play a very different game. HFT (High-Frequency Trading) funds have gotten a bad rap for being nothing more than digital "front runners," but in reality, they employ a wide array of strategies, almost all of them focused on mitigating risk. In fact, HFTs are the kings of the "not lose" trade as they break even on as much as 50% of their positions per day and yet make money almost every single day. 💻📉📈 Big firms like Virtu have lost money only on one day in six years. 🏅

If we are day-trading, the insurance model is the way to go, and the "not lose" trade should be studied much more seriously. It is the hidden key to long-term trading success. 🔑🌟