It’s the #1 rule in trading...

And the reason why a handful of traders succeed in growing wealthy… and everyone else who tries to trade stocks fails.

I’ll explain in a second.                     

First, in my experience, I’ve found people get into trading for one of two reasons.

The motivation of type 1 folks, to put it plainly, is usually to escape something they hate.

They want to make a living out of trading. To escape their “9 to 5”… escape their boss… take control of their own schedule, whatever.

Trading sounds like the answer. They imagine sitting alone at their computer, generating cash and answering to no one.

My advice: Don’t try that.

Practically speaking, you need a bankroll for trading of at least $500,000 to hope to generate the kind of income you need to live on. And regardless of how much money you’re starting with, unless you’re exceptionally disciplined and committed, it won’t go as expected.

I’m sure that sounds hypocritical coming from a guy who’s a professional trader. But look... done right, trading is a job. I work a bare minimum of 60 hours a week. Fortunately, I love it. Lifestyle benefits aside, I’d do it for free.

Most people don’t love trading full time. They fall in love with the idea of trading and the kind of life it could give them.

Type 2 wants to make some extra money. Maybe to ease financial pressures... or retire sooner than they would have... or to supplement their retirement income. That’s possible.

But most people fail, for one primary reason:

Failure to respect the “80/20 rule” (Pareto Principle) and how it determines your success as a trader or investor… whether you realize it or not.

The Pareto Principle is the inescapable fact that, in most areas of life, 80% of the results come from 20% of the input.

It’s true in the mundane aspects of life—most people wear 20% of their wardrobe 80% of the time.

And it holds true in matters of wealth.

20% of people make 80% of the money.

And professional traders—the ones who achieve lasting success—know the 80/20 rule determines their results.

The average guy rarely hears about the 80/20 rule because it’s not marketable.

Peter Brandt, of Market Wizards fame, is one of my biggest trading influences. He’s on the short list of the greatest traders alive today. He talks about 80/20 every chance he gets. A direct quote from Brandt: “If you want to trade, learn that 20% of your trades will produce 80% of your profits.”

Said differently, your biggest winners will come from a small slice of your overall number of trades.

Trades that win big are great. It’s fun to make money. The best trades tend to “work” right out of the gate. Other times, it takes a couple of “stabs” at a trade before you get it right.

Take a trade like Super Micro Computer (SMCI).

In my RiskHedge Live private trading room, we were in and out fast the first two times. But the third time was our best opportunity. SMCI has been one of the best-performing stocks this year. And last week, we closed the trade for a 112% gain in a little under three months as the stock began to show weakness.

You have to realize that this kind of trade is a minority. Only one in five trades, at best, go this way.

If a trade doesn’t go as I expect, I’ll usually cut it quickly with a small profit, or at breakeven, or with a small loss.

As Chris Reilly and I discussed last week, my “win percentage” was 56% during last year’s RiskHedge Live beta test. That’s about what I shoot for. It’s far more important what you do with your profitable and unprofitable trades.

There are over 5,000 stocks out there. In my way of trading, there’s no reason to get married to any of them. Why waste time with a stagnant trade when I can be in a "20% trade” that truly moves the needle?

Our real task as traders is to let the big winners flourish while keeping a tight leash on all other trades.

Don’t forget the 80/20 rule!

Justin Spittler
Chief Trader, RiskHedge

PS: Let your winners run, keep your losers on a tight leash…

It sounds easy. But it’s hard to execute when you’re going it alone.

I’m here to help. In my private RiskHedge Live trading room, members get my best trades in real time. I let you know exactly when to enter and exit. Just follow my instructions.

If you enjoy my Trade of the Week picks and are looking to take the next step in your trading, RiskHedge Live could be for you. Details here.