The True Measure of Any Trader’s Success

One question the students in my seminars or trainings always ask each other is, “What’s your winning percentage?”

But out of all the statistics to measure performance, winning percentage doesn’t always tell the true measure of a trader.

I’ll show you what I’m talking about…

Trader A has a winning percentage on his trades of 70%, while Trader B has a 40% wining percentage on her trades. Which trader do you think is more successful?

I’m guessing most of you picked Trader A.

But what if I told you that Trader A has a return on his money of -25% and Trader B has a positive return of 30%? Trader A wins better than 50% of the time but loses money overall, while and Trader B wins less than 50% of the time but her trades are far more profitable.

Does that change your vote? I would hope so!

You see, a trader can win a large percentage of his or her trades, but what good does that do when the small number of losses outweigh the large number of winners?

So what’s the true measure of a trader’s success?

On Tuesday, I told that two of the most important things you can do as a trader is to build a plan for every trader, and to stick with that plan through the end of the trade.

But before you can build an effective trade plan, you have to make sure you have one thing in place.

Let me show you what I’m talking about…

Three Rules for Managing Your Money

Having strict money management rules is absolutely essential to your success as a trader.

It is nice to have a good win-loss record, but if your losers are bigger than your winners, you can still lose money overall. So how do you keep that from happening?

Through proper money management.

I am not your money manager, broker or financial planner so I won’t give you specific, personal financial advice. What I’m talking about here are some general rules for money management that have worked for me. If you like what I do and want to incorporate that into what you do, then PLEASE run these ideas by your professionals and determine what’s best for you and your money.

There are three keys to managing your money as a trader…

First, know your risk!

We talk about this a lot, but it never hurts to review. From a risk perspective if you take a fixed percentage of an account to every trade, the most damage that can be done is that fixed percentage.

For example, if a trader took 25% risk on each trade, four losses in a row could wipe the trader out.

It would take 40 losses in a row for the trader that risks just 2.5% of their account to each trade. You and you alone decide what your risk tolerance is, but its best if you think like a pro and remember that leverage is key in options so a lot less cost and risk can be taken.

Second, spend the same amount on each trade.

Whether you choose to use a percentage of your overall trading capital or you use a specific dollar amount, you should spend the same amount of money on each trade.

Sometimes the biggest concern I have is when too many positive results happen in a short amount of time. We get a string of winners and that feeds a sense of confidence that left unchecked can have one start thinking of how much MORE can be made if we just RISK more! You get on a roll and think, if only I had 10 contracts instead of three I could have made SO much more money.  So on the next trade you go outside your management rules and you take your risk up to 50%.


As tempting as it is, it is wise to remain disciplined and adhere to what works. And that means

Third, don’t cherry pick your trades.

It will amaze you how the best-looking charts can fall short of expectations. So just because you think you have a sure thing doesn’t mean you should put too much of your capital into a single trade.

Likewise, don’t wait around for a trade that looks better than the rest – sometimes those trades that don’t look like winners ahead of time can exceed expectations. If you could predict winning and losing trades ahead of time, you’d be rich.

Money Calendar’s October Trades

To illustrate how these rules work in practice, I want to show you Money Calendar’s six trades for the month of October. Take a look at the performance report below.

Click to View
First take a look at the six trades that were closed in the month of October. Five of the six trades were bullish, with the IBM Puts being the only bearish trade.

The next thing I want you to focus on is that based on risking no more than $500 per trade, five of the six trades had $250 per trade risk, meaning that we could have traded two contracts per position with all of them except for the PCLN trade, which cost $400 per spread.

Next, in the Starting column, you can see that only GILD went against us on the first day. The others did not, though four of the six trades had drawdown during the trade. Only MON and PCLN maintained their option value before moving higher.

Now take a look at the summary below. Basically this shows that for October we had 83% winners and 17% losers. Our largest gain and largest loss were similar, but when you have more winners than losers, it’s OK to have a 1-1 portfolio gains to losses.

Lastly, here’s how the Money Calendar compared to the S&P 500:

But this only works if you employ sound money management. Let me show you three scenarios: one for the greedy trade, one for the picky trader, and one for the calculated trader.

The greedy trader puts more of his portfolio at risk by investing way more than the same amount per trade. The greedy trader gets on a roll and puts more and more at risk with every trade. Let’s say the greedy trader put 50% of his portfolio at risk on the UPS trade because he emotionally favors this stock.  With a full loss on the UPS trade, that would cause real harm to his entire portfolio. Now this trader has to pick up the pieces and hopefully go back to that fixed-risk rule.

The picky trader may have waited and waited to see a trade that for some reason “looked better than the others” or they finally saw enough winners to finally decide to go ahead and take a trade. And guess which trade Mr. Picky takes… you guessed it… UPS.  By trying to cherry pick, the picky trader got unlucky and chose the one trade of the bunch that did not work.

Then there is the calculated trader who all the while takes these trades with strict adherence to the trade and money management rule of not risking any more than the $500 per trade and all trades are taken with close to an equal weighting in risk.

The calculated trader participated in the trades, had solid success, and yes, found out no process is 100% accurate and took a loss on the UPS trade. But the UPS loss did not wipe out a big chunk of his account, and because he wasn’t greedily loading up on one or two trades and he wasn’t missing out on certain trades because he was too picky.

Strive to become that calculated trader who trusts his tools and applies the option trading strategies to the setups at an evenly weighted risk to the portfolio.  This will give you the opportunity for greater success.

Here’s your trading lesson summary:

Every good trade plan starts with good money management. Here are three rules for managing your money:

  1. Know your risk.
  2. Spend the same amount of money on each trade.
  3. Don’t cherry pick your trades.

Good Trading,

Tom Gentile

8 Responses to “The True Measure of Any Trader’s Success”

  1. Excellent advise Tom, I won 4 out of the last 5 trades that I followed you on, however, I usually buy or sell 10 options on each trade. I can afford more trades but 10 options on each trade has worked for me for the last several years. I am a seasonal trader but your weekly trading advise is a big help. Love your Work!!

  2. Wish I would have read this and followed accordingly prior to the older NEM and the more recent UPS plays. I went in deeper than I should have due to multiple reasons, noise, and/or conclusions I thought I had correctly identified. Thanks for the great info and reminder! May this help others as well.

  3. Hi Tom,
    Great article! The one problem I have is not being able to get into your trades sometimes because it has moved too fast and gone past the buy up to price before I get a chance to get in on the trade. Otherwise, I have placed every trade that you have recommended with the same dollar amount on each trade risked. I was wondering if there was a way of you posting the trade the night before so we can put in a limit order which would have a better chance of getting filled on market open on the day the trade is to go live? Otherwise, keep up the good work. Looking forward to working with you more in the future. Thanks, Keith

  4. yes, fully agree and its nice to have it laid out, i am still learning after 8 years of options trading, still make some big mistakes, but also try to stop myself from making mistakes, managing risk exposure is what its all about, always asking myself (how much am i prepared to loose, write the amount down and review it with the trades). I agree fully that traders should equally weigh their exposure to trades, this way, and its the only way, to manage the losses. Trust me, i have lost more than enough in previous years to learn lessons the hard way ! thanks for your advise Tom, very good guidance.

  5. Thanks again for all the comments on this article. Some great points made here include keeping a journal as well as equal risk weighting.

    Soon I will be writing about anther risk to the option trader… VEGA. This is one you want to understand and be on the right side of. Understanding VEGA goes a long way into determining how to tilt your contracts to VEGA weighted, but I am getting ahead of myself.

    Mike White – I remember long ago a weekend trip I took to Florida with another “MIke” friend of mine to see a Mike White stationed on the USS Forrestal before it was decommissioned. We ended up going diving with the Manatee’s off Crystal River that weekend… Good times… If you are the Mike White I went diving with (low probability), then tell me the last name of our other friend “Mike”?


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