Offense or defense, Part 3

From ancient times, traders have regarded the principle of “one half in one half out” as the cornerstone of money management. I believe it is important, yet it is the concept that most investors find most difficult to accept.

One-half means that you must not risk more than 50% of your trading capital with a single side of a trade, whether it is a “sell” or a “buy.” This is a capital management standard that assumes concentrating on a single security, so it should be somewhat conservative, but many people protest, saying, “Even so, leaving as much as half idle is unacceptable...”

However, considering that individual securities can move quite a bit, the conclusion is that you should keep the operating rate low to account for cases where you keep losing because you don’t match the market.

If you take a full position with all your funds, a 10% adverse move would erase 10% of your total capital. If you incur a loss cut twice at 10% adverse move, 20% of your total capital will be gone.

A 20% drop is a harsh situation. Therefore, there is resistance to stop-losses. And it tends to widen the wounds. People become stubborn and start making decisions based on their own convenience... To guarantee zero possibility of falling into such worst-case scenarios, you pay attention to the operating rate.

Let’s consider the profits in case of success.

If you ride a 30% move and take half of the price range, that’s 15% profit. If you assume this happens twice a year, that’s a total of 30% profit. However, since only half of the capital is operated, the annual return on total capital is 15%.

Many people think, “15% is so stingy...”, but the rule of “maximum 50% operating rate,” which translates the expert’s insistence on steady profits—there is no guaranteed profit, but you aim for steady gains, keeping you in a comfortable, neutral situation with always available capital—is a professional’s obsession translated into numbers.

Even in the Nakagen Sen (Midline) Position Method, the maximum operating rate is limited to 50%.

Moreover, since you must not exceed 50% when the positions are filled in three partitions, the average operating rate becomes very low. The following are quotes from the Nakagen-sen book.

1. Total capital must be prepared at twice

2. And rigidly adhere to the three-part method

That is, one-third of the positions equals one-sixth of the total capital.

(From the main text of “New Edition of Nakagen-sen Position Method”)

Securities dealers are evaluated on a monthly basis.

Common mutual funds are left alone after purchase according to settings.

Some fund managers take risks aiming for high rewards, playing the game of “get unemployed or receive 1 billion yen.”

But individual investors are all using their own money.

When trading is your business, if that capital disappears or declines significantly, it’s game over. Therefore, you act with the priority of never dying, never being forced out of the market.

If you want to treat it like pachinko and gamble with small amounts, that’s fine, but if you are practicing or experimenting in asset management, you should imitate a lone professional trader and strive to place non-losing bets.

Many failures occur when you draw scenarios solely based on your own circumstances, but the problem lies in how you use “your own convenience.” Please try to consider, even if you don’t agree, the idea of “resting according to your own convenience”.

Taking a break is a privilege granted to individual investors, regardless of professional or amateur status.

With that defensive stance, you can always increase your positions when needed.

In other words, you always keep the option to “attack.”