The Holy Grail – Asymmetric Trading

September 13, 2024
Larry Connors

Larry Connors' Trading Lesson of The Day | September 13, 2024

Do you want to know the secret to becoming extremely successful in trading?

We all do. And there are many.

But in order to create the greatest amount of wealth for yourself, the holy grail of trading comes down to only a few key things.

And one of them is constructing your trades for asymmetric returns.

What Is Asymmetric Trading?

I’ll keep this answer simple.

It’s risking one unit to make many units.

It’s not only done in trading – it’s done in many walks of life.

For example, I know many of you own or have built and sold successful businesses.

Your returns were asymmetric. You hypothetically put up $100,000 when you started your business. That was your one unit of risk (your max risk).

Years later, it was worth many times that amount. I know a few of you who have hundreds of times your initial risk (meaning tens of thousands of percent). This doesn’t include years of salary you received, the tax benefits, and the many other sources of income your business brought you.

In exchange for risking one unit, you made many times that amount. In a handful of cases, you took a relatively small amount of money and turned it into tens of millions, and in a few cases hundreds of millions of dollars.

That’s what asymmetrical returns are – risking one unit to make many units.Trading is another example of where asymmetrical returns occur. It happens all the time where successful trades are structured to risk one unit with the goal of making many units.

In fact, I’m writing this the day after a trader reportedly was fortunate enough to have turned $10,000 in a 0DTE SPY option position into millions of dollars within 5 hours. It’s an extreme example, but it happens.

I have long-time relationships with two traders who created lifetime wealth in their late 20s from option positions they held.

The 1-3 day moves were so large that each was literally staked for life. It’s decades later and both have parlayed that initial windfall into even greater wealth for themselves.

Neither knows each other, they were born in different decades, their personalities couldn’t be further apart. They only had one thing in common…they were Asymmetrical Traders.

They applied the same trade structure over and over again risking one unit to be in the position of making many units.

Yes, they took losses along the way, but in the larger scheme of trading, they were smart enough to learn at a young age that real wealth from trading is created from placing on positions with the goal of asymmetric returns.

Day One

Today will be part one of asymmetric trading. I’ll get you going with quotes from some of the greatest traders in the world who became great because they structured their trades in an asymmetric manner.

These quotes come directly from Jack Schwager’s great series of Market Wizards books. I personally know a number of the traders in his books, especially from his first three books.

Some are friends, some I’ve had business relationships with, and one was a neighbor of mine in Malibu CA, in the 1990s – Michael Marcus.

Michael was kind enough to invite me to his home a few times to share his trading wisdom with me.

Thirty-five years later that wisdom and knowledge remains with me, and I’ll forever be grateful for his kindness in taking the time to guide me and answer my dozens (more likely hundreds) of questions. Michael is also one of the most competitive people I’ve ever met – I’m pretty sure I still have black and blues from the mandatory basketball games we had to play before our lessons began.

Let’s now hear what the legends of trading have to say about asymmetric trading.

Then, in our next trading lessons, we’ll look at the ways to create positions where we risk one unit with the opportunity to make many times that amount.

Here are 20 insightful quotes from the Market Wizards series that focus on the theme of asymmetrical trading and returns, where the potential reward greatly outweighs the risk:

1. Mohnish Pabrai (Unknown Market Wizards): “Heads, I win; tails, I don’t lose much. That’s the kind of bets I like to make. The downside is limited, but the upside is virtually unlimited.”

⏵ Additional Note – Mohnish is a self-made billionaire money manager. His book The Dhandho Investor forever changed my life in understanding asymmetric trading and wealth creation.

Over my 43-year career, I’ve read hundreds and it likely borders near 1000 books on trading and investing (my philosophy is you can always learn something new from everyone). The Dhandho Investor has had the greatest impact on my thinking when it comes to trading and investing.

2. Colm O’Shea (Hedge Fund Market Wizards): “I’m always looking for asymmetrical trades—where the upside is far greater than the downside, and the probability is in my favor.”

3. Richard Dennis (Market Wizards): “You could publish the rules in a newspaper and no one would follow them. The key is consistency and discipline, but also identifying trades where the potential payoff is huge relative to the risk.”

⏵ Additional Note – If you’re new to trading learn about “The Turtles” (look them up or better yet, use AI (ChatGPT 4.o) to go deeper. Richard is the “father” of The Turtles.

4. Monroe Trout (The New Market Wizards): “The key is to structure trades so that the potential reward is at least three to five times the risk. That way, you only need to be right a small percentage of the time to come out ahead.”

⏵ Additional Note – I’ve never met Monroe but one of his former traders interviewed for a position with me a number of years ago. He was bound by an NDA which he abided by. The few pieces he was allowed to share were, at the time, eye-opening to me. The level of detail in identifying asymmetric trades was beyond anything I had ever heard of at that time.

5. Stanley Druckenmiller (The New Market Wizards): “The way to build long-term returns is through preservation of capital and home runs.”

⏵ Additional Note – Read my series on not using stops. Druckenmiller is the star.

6. Paul Tudor Jones (Market Wizards): “I look for opportunities with tremendously skewed risk/reward opportunities. You can be far more aggressive when you’re making a lot of money and even more cautious when you’re losing.”

⏵ Additional Note – Paul Tudor Jones has decades of substantial audited returns for his hedge fund. He’s known for being one of the best asymmetric traders in the world.

7. Michael Platt (Hedge Fund Market Wizards): “The key is to identify opportunities where you can risk a little to make a lot.”

8. Larry Benedict (Hedge Fund Market Wizards): “If you manage your risk and stay in the game, you only need to hit a few big winners to have a successful trading career.”

⏵ Additional Note – This ties directly to the two traders I mentioned at the start. Each had one very large life-changing winner and it led to a lifetime of wealth creation for each.

9. Mark Minervini (Unknown Market Wizards): “Asymmetrical trading is about minimizing your downside and maximizing your upside. It’s the only way to trade long-term.”

⏵ Additional Note – Mark is one of the best momentum traders in the world, and is a disciple of the IBD methodology. He has three great books on trading which are worth reading.

10. Michael Marcus (Market Wizards): “One of the hardest things to learn is that your job is not to make money but to find asymmetric opportunities and manage risk effectively.”

11. David Einhorn (Hedge Fund Market Wizards): “It’s very rare to find a trade where the downside is 1% and the upside is 10%. But those are the trades you wait for.”

⏵ Additional Note – Another self-made billionaire fund manager who adheres to asymmetric trading.

12. Ray Dalio (Hedge Fund Market Wizards): “I knew that to make a lot of money, I had to take big risks, but I was determined to find a way to make asymmetrical bets where the upside was much larger than the downside.”

13. Larry Hite (The New Market Wizards): “Frankly, I don’t see markets; I see risk, reward, and money. You should always structure trades to get an asymmetrical payoff.”

14. Ed Seykota (Market Wizards): “The trick is to manage the downside while giving yourself the opportunity to capture outsized returns.”

15. Bill Lipschutz (Market Wizards): “You don’t need to catch every move; you only need a few large moves that can provide a disproportionate return to your risk.”

⏵ Additional Note – Sound familiar?

16. Bruce Kovner (Market Wizards): “You want to trade in situations where you can win big if you’re right and lose small if you’re wrong.”

⏵ Additional Note – Self-made billionaire and founder of Caxton Partners. Michael Marcus was his mentor.

17. Michael Steinhardt (Market Wizards): “The key to trading is asymmetry: take small losses and let your winners run.”

⏵ Additional Note – Another legendary self-made billionaire hedge fund manager. Michael retired but his trading success is legendary.

18. Tom Shanks (Unknown Market Wizards): “When you structure trades that give you asymmetrical risk/reward profiles, you can be wrong more often than right and still be profitable.”

19. Tom Basso (The New Market Wizards): “The beauty of asymmetrical trades is that you can be wrong most of the time and still come out ahead.”

⏵ Additional Note – Tom brings out a common theme – it’s not how often you’re right. It’s how much do you make when you’re right compared to how much you lose when you’re not.

Simple formula!

20. Jim Rogers (The New Market Wizards): “If you can figure out when the odds are on your side in a huge way, you don’t need a lot of trades. A few asymmetric trades can make your entire career.”

⏵ Additional Note – This says it all.

Wrap Up

Different traders, different markets, and all have very different personalities.

The one thing they all have in common is that they are Asymmetric Traders.

I hope you become one too.

We’ll begin looking at how to build asymmetrical trading strategies on Monday.

Enjoy your weekend!

Larry Connors

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