While traditional investing advocates for fewer occurrences and values the buy and hold strategy, we at tastytrade take a statistical approach to trading. We believe in putting on many small high probability trades to increase our probability of success.
Taking on too much size on a particular trade or allocating too much capital can result in a large drawdown in a trader’s account. This might make it difficult or nearly impossible to recover from. For example, if you lose 20% of your account on any particular trade, it takes a 25% return on your portfolio in order get back to where you started. The greater the drawdown, the more difficult it is to get back to even. If you were to lose 60% of your account on a trade, you would have to make a 150% return in order to get back to even. This makes it almost impossible to come back and is one of the main reasons why we stay small.
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