Keep losses small to tolerate poor accuracy

By | Inversion, Investing

(Excerpt from Think & Trade Like a Champion by Mark Minervini)

Most people are surprised when I tell them I would rather be able to maintain profitability at a 25 percent batting average than a 75 percent batting average. Why? Because it allows me to be wrong many times and still make money; it builds “failure” into the system. I try to build as much failure as possible into my trading in the areas that I don’t have direct control over. You can’t control your batting average because you can’t control what a stock does after you buy it. My way of governing the areas that I don’t directly control is not to rely on them too heavily. My edge is maintained by keeping my losses at a fraction of my gains. The smaller I keep my losses in relation to my gains, the more batting average risk I can tolerate, which means the more times I can be wrong and still make money.

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