[The Trading Edition] Episode 26: How to rescue yourself from a losing streak in the pit of defeat. The "6% Rule" for humbly resting the market ??
In the last time (the 25th session), we learned together about the 2% rule to prevent a single “shark bite” that could dealing a fatal blow to your account in one shot. It was an important first step to protect your funds.
However, in the vast natural environment of the market, there is another terrifying trap lurking that we must beware of. It is the fear of a losing streak that gradually accumulates. This time, please allow me to talk about another defensive measure to face our own emotions honestly and engage with the market in good faith.
1. The school of piranhas and our stubborn hearts
Dr. Elder describes losses from a losing streak as a “school of piranhas.” Even a single piranha bite might be small, but if you are attacked by a herd, you can become bone-dead in no time.
What we really need to watch out for here is our own mindset when losses keep piling up. When trouble hits, we tend to rush to “make it back” and push for bigger positions, forcing forward. Professional traders take a humble break when losses accumulate, but amateurs often continue trading until their account funds are depleted. We too must constantly reflect on whether we are unknowingly falling into such traps.
2. The gentle binding that forcibly gives you a rest: the “6% Rule”
What gently but firmly protects us from that school of piranhas is the “6% Rule.” The rule is as follows.
Add together “the total realized losses for the month” and “the total risk amount of all currently held positions (the amount from entry to stop loss).” If that total reaches 6% of the account funds at the start of the month, you must not take on any new trades for that month. Once the limit is reached, you are forcibly taken out of the market and must pause trading until the end of the month.
For example, if you started the month with $50,000 in capital, the maximum allowable risk for that month would be 6%, or $3,000.
3. The humble courage to pass up attractive opportunities
Let's imagine a concrete scenario. You manage your funds well, adhere to the 2% rule, and buy stocks A, B, and C in sequence. Each carries a 2% risk ($1,000) apiece. At this point, the total risk has reached the upper limit of 6% ($3,000).
The next day, you find stock D, a very attractive name. The chart pattern is perfect, and you’re itching to buy it now. However, the 6% rule stands in your way. You are already risking 6% of your funds, so taking on any more risk is forbidden. No matter how tempting the opportunity looks, prioritize your own financial situation and quietly pass. This humble attitude may be the key to surviving in the market for a long time.
If you really want to make a new trade, you must wait for your existing positions to move in the direction you desire and for your stop-loss to be raised to the break-even level. Only by reducing the existing risk in this way can a “frame” for taking on new risk be created.
