Why I Don't Fix Broken Trades (And Neither Should You)

I'm sitting here down 80% on two trades, and my inbox is filling up with the same question: "Don, what are you gonna do?"

The answer is absolutely nothing.

My XLF position is getting crushed. Silver trade looks like it's headed for the graveyard. And I'm not lifting a finger to "save" either one.

Here's why that's exactly the right move - and why your urge to fix losing trades is killing your account.

Fix Is a Four-Letter Word

"Fix" is a very dirty word in this business.

People convince themselves that fixing something isn't just throwing good capital down a bad hole. But that's exactly what it is.

When you're staring at a losing trade, your brain starts manufacturing reasons to add more money. "If I just roll it out..." "If I add some protection..." "If I turn it into a butterfly..."

Stop. You're about to make the expensive mistake that separates amateurs from professionals.

The Allocation Rule That Changes Everything

Here's the rule that keeps me sleeping at night with two 80% losers on the books:

If you risk $500 in one trade, you risk $500 in every single trade.

Not $200 on the "safe" trade and $800 on your "high conviction" play. Not $500 usually but $1000 when you're "really sure." Exactly $500, every time.

Most traders treat position sizing like a volume knob - turning it up when they feel confident, down when they're scared. That's backwards thinking that guarantees you'll blow up your account.

In-out spreads are designed for numbers of occurrences. 

The XLF trade going bad doesn't invalidate the system any more than hitting a green light validates your driving skills.

The Math That Keeps You in the Game

Sometimes I do $5-wide spreads with $2.20 of risk. Yesterday I sent out a trade with 88 cents of risk. These have to be equivalent in your position sizing.

If you normally risk $100 per trade, you can't do the $2.20 trade. Simple as that.

Here's what kills careers: "I'm a 10-lot trader." Guy trades 10 contracts of SPY, then trades 10 contracts of SPX options. SPX is exactly 10 times the size.

You know what happens next? You end up living in mom's basement until you're 37. And that's if you're lucky enough to have a mom who'll take you back.

Numbers of Occurrences vs. Individual Trades

Trading is always about numbers of occurrences. Always.

This is a sequential game. You keep showing up, you keep doing the same thing. Your edge comes from consistency, not from hitting home runs or saving losers.

When someone emails me "I did three trades and you suck" - well, the first three trades they did were probably XLF, silver, and maybe Walmart. I hit Walmart for 44%, and the other two are currently sucking.

That's not a system failure. That's three data points. Come back after 50 trades with consistent sizing, then we'll talk about whether the approach works.

The Discipline That Builds Wealth

Nothing you're gonna do is going to fix a broken spread. Nothing.

I could roll it out. I could do a little dance, make a little love. But I will not add more risk to a defined-risk trade.

The reason I do spreads and fire them out to what I call "gen pop" is simple: you can't really get hammered if your allocation is right.

The silver trade? I kinda like "don't ever tell me the odds" - that's what Han Solo told C-3PO before Star Wars belonged to Disney and sucked.

The Real Secret

Your competitive advantage isn't predicting which trades will work. 

It's sizing them so the ones that don't work can't kill you.

When you're tempted to "fix" a losing position, remember: you're about to turn a small, defined loss into a potentially unlimited catastrophe.

Take the loss. Keep the discipline. Move on to the next trade with the same size, the same process, the same patience.

That's how you stay in the game long enough for the numbers to work in your favor.

To your success,

Don Kaufman