And in another article Gary said:

Q: What aspect of trading took you the longest to learn?

GBS: I’d say the view that my equity is the same as a retailer’s inventory. Your profit per piece doesn’t matter if you never turn your inventory. And your turnover doesn’t matter if you’re losing money on each sale. What matters is the turnover times profit per piece.

That’s the same concept I try to apply to my trading. I start with $1 and want to figure out how to quickly turn that into $10. Most people focus on buying a stock at $20 and selling it at $40, and they rarely care how long it takes them to do that.

However, if during that time I can buy 10 $20 stocks and sell them each at a 10% gain, I’m way ahead if I continue to compound my equity.

To touch on the importance of the size of your equity and position sizing I’ll use part of a snowball fight metaphor that Tharp uses in his book:

Imagine that you are hiding behind a large wall of snow. Someone is throwing snowballs at your wall, and your objective is to keep your wall as large as possible for maximum protection.

Thus, the metaphor immediately indicates that the size of the wall is a very significant variable. If the wall is too small, you couldn’t avoid getting hit. But if the wall is massive, then you are probably not going to get hit. The size of your initial equity is a little like the size of the wall. In fact, you might consider your starting capital to be a wall of money that protects you. The more money you have, assuming all the other variables (the components of expectancy listed above) are the same, the more protection you will have.

Now imagine that the person throwing snowballs at you has two different kinds of snowballs — white snowballs and black snowballs. White snowballs are a little like winning trades. They simply stick to the wall of snow and increase its size….

Imagine that black snowballs dissolve snow and make a hole in the wall equivalent to their size. You might think of black snowballs as “antisnow.” Thus, if a lot of black snowballs were thrown at the wall, it would soon disappear or at least have a lot of holes in it. Black snowballs are a lot like losing trades — they chip away at your wall of security…

Tharp continues walking the reader through different scenarios and possibilities. Like considering the relative sizes of the snowballs of each color. What happens to your wall after being hit by some black boulders of snow? Or considering how the rate at which snowballs are thrown affects the wall. You can see how important each aspect of expectancy is as well as the huge importance of both the amount of equity (the size of your wall) and position-sizing (which will determine the size of the snowballs).

Expectancy, position-sizing and other aspects of money management are far more important than discovering the holy grail entry system or indicator(s). Unfortunately entry techniques are where the vast majority of books and talking heads focus their attention. You could have the greatest stock picking system in the world but unless you take these money management issue into consideration you may not have any money left to trade the system. Having a system that gives you a positive expectancy should be in the forefront of your mind when putting together a trading plan.