Trading is about survival, not getting rich

Petri RedelinghuysLatest, TraderPetri

Where's your stop loss?Many moons have passed since I last wrote a blog here. It feels pretty good to be able to share some thoughts again. In truth, I have known for some time what I want to write about, I just realised that it might not be an easy topic to broach. But as the saying goes… YOLO.

The wild years

The last two years in this market have been wild! I know that I’ve said this before, and maybe it’s not that the years are getting more and more hectic as each one passes. Maybe it’s just how life goes? Your personal life, and markets for that matter, just keep getting more and more challenging. I’ve often told people that the reason I like markets is because it’s like a huge puzzle that changes every day, so solving it is actually impossible. But trying to is a lot of fun. This has never been truer than over the last two years.

Survive the market

Twitter was alive with new traders posting their gains, and then suddenly the market turned downwards. The meme stocks turned and Twitter is once again silent. Well, not silent, but only the survivors are still tweeting. There is a lesson in that. 

Many people enter into markets thinking that they can easily replace a salary, or make a ridiculous amount of money in a very short time. This is partly the fault of misleading advertising by so called gurus punting courses, or brokers targeting greed to motivate you to use their platforms. Now that I have been running my firm for the last five and a half years, I understand this – advertising is necessary. But I think it is very important for new entrants to have a realistic set of expectations, before putting any money at risk.

If you want to get involved in markets and trading, you must understand that it is not easy. It’s about controlling drawdown and defending your capital at all costs. I can’t tell you how many times I have had to re-learn this lesson over the last decade. So, what are the key things you need to do in order to survive the market?

Watch your gearing

There are many ways to manage risk. The most popular method new traders are taught is the 2% rule. I am sure that if you search around this very website you will find a detailed explanation of how it works. But be warned, it is not infallible.

The basic concept is to risk only 2% of your capital on any given trade. This makes sense, although your position size is a derivative of where your entry and stop loss is. The risk that this opens you up to, is that if you put really tight stop losses, your position sizes can sometimes be rather big. This is especially true when you are trading geared instruments like CFDs.

For example, say you have R100k in your account and want to risk R2k on a trade. Fair enough. But because your stop loss is very tight, your position size might be R80k for an individual trade. Let’s say you end up taking six trades, all varying in size and all calculated with the 2% rule. You might find yourself running R300k or more in terms of nominal exposure.

This is great if the trades go your way, but what if something unforeseen happens and the market gaps down due to some geopolitical risk event, or say a pandemic? Then the odds are good that you slip passed your stops and take a much bigger loss than you anticipated. Six times in a row. This can do a lot more damage than the 12% you had anticipated.

Thus, a good rule of thumb that I have been using for the last while, is to not take more than 1/7th of your capital as exposure on any given individual trade. Yes, this means that you will not make as much when you get trades right. But it also means that when the wheels fall off, the damage done is considerably less. Be conservative. Yes, this is short-term trading, but remember that your job as a trader is to ensure that you are available to take the really big opportunities. The only way to do that, is to ensure that you have the capital to take those opportunities when they do come around. In other words, you must survive long enough to take the extraordinary opportunities that the market presents.

There is a once in a lifetime opportunity every year

Many people fret about missing that elusive once in a lifetime opportunity, and lament the opportunities they missed. This can lead to desperate risk taking in order to make up for it.

Think of Sasol in 2020. The brave and wise bought sub-R50 and are now sitting in a very good position. Another example is Thungela Resources, which has already doubled… this year. Or Textainer, which has doubled since 2021. The point is that every single year there is an opportunity to take a massive trade. It is only our own fear and greed that drives us to chase low probability trades in too much size.  This is what keeps us struggling to make money in the market: our need for instant gratification. We need to be patient and extremely picky about what we are willing to take risks on.

If you have missed that one life-changing chance to tenfold your money, don’t worry. There will be more of those opportunities in the future. You just need to make sure you survive in the market long enough, to be around to take them.

Don’t ignore the macro-economic data

I have oftentimes said ‘ignore the news and focus on the charts’. There is truth in that, as theoretically in an efficient market all known information is quickly reflected in prices. That being said, there are data points that can drive markets in ways that might not make sense to people who are not watching them.

For example, the Rand has been getting stronger and stronger in the face of severe global risk (the Ukraine/Russia war). This has caused many people to think ‘this is not possible, with so much risk why is the Rand so strong?’. Naturally, they then try to fight the trend and keep trading for a weaker Rand. As you can imagine, this has not worked so well for them.

If you’d scratched around and found the foreign investment flows in and out of our equity market, you would have noticed that there had been a lot, and I mean a lot, of offshore buying of local equities. This will naturally lead to a stronger Rand as money must first flow into South Africa before it can flow into our stock market. But why are foreigners investing in South Africa when the world is falling apart? Again, with some scratching around you could find that Russia (for obvious reasons) has been dropped from international indices. And China is not exactly in the world’s ‘good books’ either. Thus, many international fund managers who have mandates to invest in Emerging Markets have become forced buyers of South African stocks. This information, could explain why our market is behaving this way. And that information is publicly available with a few Google searches.

So, while you want to take trades only when there is a good ‘technical’ reason and you can clearly set your risk parameters (stop losses), you also want to make sure that you’re swimming with the tide. The best way to do this is to understand what is happening in the world around you.

News can be noisy, so try to focus on data. See each data point you find as an input into making an informed decision. And if there are multiple data points confirming your decision, it is most likely the right one.


This is a 2022 update to the Trader Petri blog.

Trader Petri learned his trading lessons the hard way. This blog is a brutally honest account of the pressures, joys and fears of a real life trader. The blog starts in 2015 when Petri was focused on building his trading skills and capital. It ends in late 2017, when Petri has battled day trading, swing trading, revenge trading and crazy trading.

Petri is still a day trader, now building his own asset management firm Herenya Capital Advisors in Johannesburg.