When I asked Paul Tudor Jones what was the most important advice he could give to the average trader, he replied, “Don’t focus on making money; focus on protecting what you have.”
Most trading novices believe that trading success is all about finding a great method for entering trades. The Market Wizards I interviewed, however, generally agreed that money management (i.e., risk control) was more important to trading success than the trade selection methodology. You can do quite well with a mediocre (i.e., slightly better than random) entry methodology and good money management, but you are likely to eventually go broke with a superior entry methodology and poor money management. The unfortunate reality is that the amount of attention most beginning traders devote to money management is inversely proportional to its importance.
Don’t focus on making money; focus on protecting what you have.
Paul Tudor Jones
It is instructive to consider how the Market Wizards approach risk control. Marty Schwartz provided perhaps the best succinct description of an effective perspective on risk control. Schwartz’s advice is simply, “Know your uncle point.” I don’t know whether the expression “say uncle” is still used today, but when Schwartz and I were kids, saying “uncle” was the call of surrender to make the pain stop. If two kids ...