When I was new in trading, I was always amazed by traders who snapshot their portfolios with huge percentage gains on their trades. That time, I was really impressed and how I wished I could get those massive gains they are showing.
But, as I go deep into learning how to trade, I have found out that percentage gains doesn’t really matter! Percentage gains doesn’t really matter because what really matters is how much a trade will affect our portfolio!
Imagine a portfolio that has a 100k buying power and you have traded a bagger stock that have favored you.
With that stock, you gained 100% on the trade.
The problem is, you have only bought 10k worth of shares and you only gained 10k as well.
Now the question is, how much did that trade affect your portfolio?
Only 10% portfolio gain right? Now, you feel all confident and all because of that bagger trade you decided to trade that setup again for the next time.
This time, since you are confident with the setup, you went all in, buying 100k worth of shares.
The problem is, there was a black swan and the trade went against you and you have incurred a -10% loss on that trade.
So how much did that trade affect your portfolio?
Yes! You can think it’s okay because you only lost 10% but the truth is, you just lost 10k and just realized that you lost the 10k that you have gained from your bagger trade, wiping your gains and getting you back to square one.
Just like this kid’s reaction.
That’s my reason why percentage gains/losses of a trade doesn’t really matter.
It doesn’t matter if we land a bagger trade or just a 10% gain trade. For me what really matters is how much risk we put in every trade, it’s the conviction of the trade that matters.
Let us say that in every trade we only risk 1% of our whole port and only take 1:2 risk:reward ratio trades as rules in our trading.
Knowing that, I wouldn’t care about how big the percentage gain of the stock in my favor would be. Simply because I know that after putting my position size and executing the trade as planned, it’s either I lose 1% or I gain 2% of my whole port (without considering of falling short or overshooting from target price).
That’s just how I approach it for it to be simple.
With that approach I could easily track my trading performance and treat every trade’s risk equally.
Who know’s maybe there’s better way of doing it. Any thoughts?