I used to love playing the board game Snakes and Ladders. Sometimes, it’s the simplest games that are the most fun and exciting, even if they are a little bit frustrating at times!
For those who have never played, the game is simple: roll a die, and a number will come up from 1 to 6. Whichever number comes up, you move forward by that many spaces . If you are on the number 7 and you roll a ‘3’, you would move forward 3 spaces to the number 10. The goal is to reach the number 100. Along the way, if you land on the bottom of a ladder, such as square 4 in the image below, you can quickly climb up the board to the top of the ladder, in this case, to square 25. This is a fast way to make progress, however if you land on a square that contains the head of a snake, such as square 27, you would then slide back DOWN the board to the end of the snake, in this case, all the way back to square 5.
To make it even harder for you to reach the 100 square and win the game, there are more snakes on the board than there are ladders. The snakes are also longer than the ladders, so any gains that you make can be quickly wiped out should you land on an unfortunate square like square 99, which would send you all the way back to square 41.
In many ways, the financial markets are like an adult version of the board game snakes and ladders. All traders start out with a goal in mind – think of square 100 as your financial goal, let’s say $5,000,000 or $10,000,000. You could break it up into small steps – perhaps 100 small steps, in one of two ways:
- You can divide the goal by 100 steps (so for a goal of $1,000,000, each step becomes $1,000,000 / 100 = $10,000). OR
- You can set each goal as an increase of 10% on the previous step. For example, if you are starting with $1,000, the first step would be $1,100 (which is $1,000 increased by 10%). The next step would be $1,100 x 1.1 which is $1,210, etc. As an example, $1,000 increased by 10% one hundred times would give you $13,780,612.
You can use a formula of End Goal divided by (1.1),x where the X is the total number of steps that you want to spread your goal out over. As another example, $10,000,000 / 1.1100 = approximately $725, meaning if you increased $725 by 10% on one hundred occasions, it would grow to $10,000,000.
Back to our game of Snakes and Ladders in the financial markets, when it is our turn, we take trades and if we do our analysis correctly, we have the opportunity to move closer towards our goals. Sometimes along the way, we hit a ladder and we rocket upwards towards our goal, leaping forward several steps at a time. For example, the closer you can enter to a market turning point (see Active Trader Program Online Training to learn how to identify potential turning points in advance), the higher your Reward to Risk Ratio (RRR) is going to be on a trade. The higher your RRR is, the larger your position size, which means the faster you can move forward towards your goal!
So far, that all sounds pretty good! We’re taking trades, we’re moving forward towards our goal, and sometimes we land on a ladder and jump up several steps towards that goal at once. However, we now have to talk about the dreaded ‘snakes’ lurking out there in the financial markets.
Everybody has heard a story somewhere – maybe from a friend or family member, or even from a tv show or a movie – but everyone has heard a story of someone who landed on a snake in the financial markets, and took several steps backwards, away from their financial goal. There was the 1987 market crash, which saw stock prices halve in Australia in a matter of weeks, there was the so-called Tech Wreck of the early 2000s hitting technology stocks, the 2008 Global Financial Crisis and of course, the Covid Crash of 2020, just to name a few. In each of these times, there were people who lost significant amounts of money in the financial markets, watching on helplessly as their portfolios fell in value, like someone who just landed on square 99, the biggest snake of them all.
Now, we know that financial markets can be very rewarding. For example, a trader named George Soros made a billion dollars in a single day of trading during the British Pound crash of 1992 (a very interesting case study that I dissected in our Active Trader Program Online Training), so clearly, some people achieve their financial goals through trading! However, we also know that there is risk involved in trading financial markets. Some people choose to manage that risk by taking very small position sizes, effectively removing both the snakes and the ladders from the board. Others simply decide to not trade at all, although by doing so, they miss the opportunities that markets provide us for moving towards our financial goals. However, I think this is the wrong way to approach it.
One of the best things about trading is that we basically create our own game board. We are starting at square 1, and we get to decide on our end target. Along the way, there will ALWAYS be both snakes and ladders in the market, but here is where it gets really interesting. One of the earliest pieces of trading wisdom that I ever heard was “Cut your losses short but let your profits run”. In other words, use protective orders called ‘stop losses’ to take you out of trades quickly if you are wrong, which means that even though the snakes are still there, they are almost harmless because they are now all very small. At the same time, let your profits run and give them an opportunity to grow larger and larger. In doing so, you leave all of the ladders on the board, in their original sizes. Can you see the power of this? If you do your work and follow your plans, your losing trades will be like snakes with very short tails, while your winning trades will be like very long ladders! You will literally be playing a game of Snakes and Ladders that is rigged in your favour.
To learn a simple, three step system for finding and taking trades with a Reward to Risk Ratio of 10 to 1 or more (in other words, to play a game where the ladders are ten times longer than the snakes!), check out Safety in the Market’s Active Trader Program by clicking here.