The Defensive and Aggressive Nature of Trading
Updated: Oct 29
Defensive and Aggressive Trading is ultimately a question of capital preservation and decision quality. A practical approach defines risk before entry, sizes positions consistently and accepts that losses cannot be eliminated.
Nature Of Trading: In This Guide
Key lessons and practical rules
The original Financial Wisdom guide and media
Evidence, limitations and risk controls
Frequently asked questions
Related guides and authoritative sources
Key Takeaways
Losses are unavoidable; uncontrolled losses are not.
Position size should follow the distance to a logical invalidation level.
Gaps and liquidity can produce execution beyond a planned stop.
Portfolio exposure matters as much as risk on one trade.
Original Financial Wisdom Guide
Background and Core Ideas
What you need to know!
The defensive aggressive nature of trading
Imagine you are going on a long road trip covering a 1000 kilometers distance. As with all road trips, this one also has cities, villages, and express highways you must pass.
While expressways give you a clear passage where you can speed up, cities and villages slow you down because of traffic snarls and speed bumps among many other things.
Let’s assume highways make up 70% of the trip and the remaining portion is cities and villages.
As a conservative driver, you can pass the cities and villages at below-average speed and also not speed too much on highways to cover the distance in 20 hours, averaging a speed of 50km/hr. You sped up on the highways averaging a speed of 60 km/hour and go slow in cities and villages at an average speed of 36 km/hr.
As an aggressive driver, you can utilize the full speed limit of 100 km/hour on the highway and the same 36 km/hour in cities, covering the distance in just over 15 hours, saving 5 hours of time relative to the conservative driver.
Some assumptions here must be noted:
· The aggressive driver is quite experienced and knows the dangers of speeding up.
Practical Checkpoint
Define the setup, entry and invalidation level before acting.
Compare the potential payoff with risk-reward planning.
Set the trade size using consistent position-sizing rules.
Rules and Practical Application
· He has phenomenal control of the car and has been driving the same car for years now, and
· He only speeds up on the highways where he has a clear pathway to march on.
The aggressive driver covers the road trip in 25% lesser time than the conservative driver.
Now imagine both of these drivers take 1 such trip every week. This will save a lot of time for the aggressive driver and the hours saved pile up week after week.
While the conservative driver here characterizes a long-term buy-and-hold investor, the aggressive driver most aptly characterizes great traders.
Great traders also do the same. They hit the accelerator hard when markets are throwing easy money and go slow, apply brakes, and even come to a halt when the easy money environment is gone.
Members of our group following my trades will know this is my approach. I deleverage, reduce position size and reduce position volume during the difficult times, and do the opposite in more generous times.
Newbie traders tend to do the opposite, especially when the markets are hostile. Emotionally charged, they would trade outsized positions, leverage to the throat, and throw risk management out of the window.
Evidence Check
Is the sample broad enough to include difficult markets?
Do the results include spreads, fees, slippage and failed signals?
Could hindsight, survivorship or selective examples explain the result?
Evidence and Examples
This is why they end up surrendering a large part of their profits and capital.
It’s the same as the driver being aggressive in traffic snarls and speed bumps.
He would not only drive unsafe but also damage the car, possibly ending the trip halfway to take a taxi back.
The winning combination of trading
The winning combination of trading is always being aggressive and winning big when odds are in the trader’s favor and becoming a meek observer when the chances to lose money are higher. It’s most apt for a trend trader, who would be aggressive when the markets are trending and would sit on the sidelines or trade much lighter when the market throws its tantrums.
The aggressive part of trading
The best time to get aggressive in trading is when you have honed your edge with practice and markets are conducive.
When we talk about stock markets, most successful traders make a large part of their money when the markets are trending. Once they have refined their strategy and minimized the mistakes, they go all out and trade aggressively to make the most of trending markets.
This chart of my trading returns represents that theory, periods of aggressive trajectory followed by periods of stagnation.
Risk and Limitations
Great traders like Paul Tudor Jones, Mark Minervini, William O'Neil, and David Ryan did the same when they had small accounts.
To give some context on how this benefitted them, Mark Minervini averaged 220% per annum return for five years in the 1990s, boosting his trading account by 330x. Paul Tudor Jones delivered triple-digit returns for 4 straight years before Minervini. David Ryan clocked a 1379% return at the account level and won the US Investing Championship three times.
All of these traders stumbled quite a lot before these performances, but once they were done making and learning from all the mistakes newbies make, they were on a roll.
The defensive part of trading
Even when the star traders made those kinds of returns, they did not keep trading the same style when the markets turned. They got less aggressive and adapted to the changing markets. Though Paul Tudor Jones traded the short side, Mark Minervini and David Ryan generally sat on cash after the easy money environment was gone, a similar tact to me.
In trading, you make a lot of money in good times but fail as a trader if you don’t know how to keep that money in bad times.
Taking your good market aggression to a bad market can wipe off your account in a short time. Bear markets and corrections are brutal and it’s best when you don’t play with them.
A trader who sees opportunities in trending markets only will by default move to cash in a volatile market, when there are no opportunities.
Some traders, however, have problems sitting on cash. They would change their style, trade derivative, trade different asset classes, and do what not, ultimately draining their capital and mental energy.
Avoiding Emotional Overreaction
That’s something you must not do. Recognize that “cash is also a position and sometimes the best position”.
Even when you see the trading conditions changing, don’t go out all at once in the beginning. Test the waters with smaller capital, take progressive exposure and get aggressive only when those initial positions start working.
The final word
Trading, especially swing and positional, is not a profession in which you make x dollars every day and go home. You must choose times when you will make the best of your money and remain inactive in the hard penny environment.
Put out your bucket when it’s raining and don’t go out much when it’s not.
Trading is a business that looks easy but is psychology tolling if you don’t have the right temperament. Therefore, before putting your hard-earned money at risk, train your mind for all it takes to make and, most importantly, to keep money in trading.
If you are able to do it year after year, you learn a skill for life that not only provides you a living but also builds a fortune for you.
My breakout strategy - 15 page rule book (PDF) is available for all members to use.
My Breakout Scanner - https://bit.ly/3ea6sl8
Balancing Defensive and Aggressive Decisions
My Forum - https://www.financialwisdomTV.com/forum
My Strategy Blueprint - https://www.financialwisdomtv.com/plans-pricing
My Brokerage Account (Interactive Brokers) - https://bit.ly/3HVA1nc
Practical Limitations
Historical examples, book claims and indicator results are educational illustrations rather than forecasts. Outcomes depend on the market, timeframe, data, transaction costs, financing, taxes and execution assumptions. Test complete rules across varied conditions and define the maximum acceptable account risk before taking a position.
Put This Into Practice
These ideas become more useful when selection, entry, stop placement, position sizing and trade management form one repeatable process. The Financial Wisdom Trading Blueprint connects those decisions in a practical weekly framework.
Frequently Asked Questions
Can a stop guarantee the maximum loss?
No. Gaps, liquidity and order type can cause execution away from the intended trigger.
What is the first risk decision?
Determine where the idea is invalidated, then calculate a position size that keeps the account-level loss acceptable.
Further Reading
References and Further Reading
Educational information only. Trading and investing involve risk, including the possible loss of capital. Examples are illustrative, not guarantees of future performance, and nothing in this article is personalised financial advice.
About the Author
Written by Gareth, MBA
Gareth, founder of Financial Wisdom, has more than 30 years of personal trading experience. He competes in the United States Investing Championship, creates award-winning trading content and has been featured in Technical Analysis of Stocks & Commodities.
Wel said! Perhaps 'Passive - Active' might be more accurate and palatable....ooops they'll be calling ME a pedant if I carry on like that!
I've also thought of the way the elderly are regarded in various cultures. These days in our society and influenced by modern management's disregard for experience and knowledge whilst favouring youthful vigour....ie. The 'Tired and Wise' versus the 'Vigorous but Inexperienced' :) .
The trouble is that people don't realise how important experience and practice is. The modern tendency is to prefer relatively young managers, with the 'latest ideas', but no life experience or humanity. Trust me I've worked for them! :)
I think Elders are revered in more primitive cultures with no written language or…
On wisdom... one definition states -
noun: wisdom
the quality of having experience, knowledge, and good judgement; the quality of being wise.
"listen to his words of wisdom"
To gain wisdom, one needs experience, and some experiences need time on planet earth, time to make mistakes and learn what works. Perhaps that's why some cultures trust their elders? Not sure if I'm completely happy with the term "defensive - aggressive" although I kind of agree with the main thrust of the point...
Which reminds me to write about my psychological character flaws... I'm very strategic and analytical, on one occasion been called a pedant!
Our approaches are very similar and I couldn't have written a much better analogy myself!😀 To me it's total common sense but some don't get it. I learnt it too late in life but hey.....I still have a few years, hopefully!😱 T'would be helpful if the S&P500 was overlaid on your cash performance, even BETTER in a separate and near equal (vertically) window. By the time you learn about life, it's too late... and similarly with investing, unless you get the right breaks & pointers early.
I do believe if you come across the likes of the Finanical Wisdom resources early enough it would transform your performance.