Thinking Backwards: How Charlie Munger's Inversion Technique Saved My Trading Account (And Could Save Yours)
Avoiding Trading Disasters: Charlie Munger's Inversion Technique
Jerome Powell just dropped some clarity on September rate cuts—something the market kinda expected but hadn't fully priced in. Perfect timing, really. With Labor Day approaching and August's low trading volume about to pick up, we're hitting a crucial moment for the rest of the year.
Throughout my career training thousands of traders, I've noticed something interesting. The biggest mindset shift doesn't come from fancy indicators or techniques. It's actually Charlie Munger's inversion technique: figure out what would make you fail, then... don't do that stuff. Simple, right?
This approach has kept me from blowing up accounts. Sure, I've had bad days (and some pretty awful months), but never a losing year. Why? Because I'm always thinking about how not to crash and burn.
So what are these account-killers? First up is counter-trend trading. I can't tell you how many traders I've seen fight the trend instead of riding it. They see DHI climbing and think "it's too high!" so they buy puts. Bad move. The smart play is buying calls on dips when the trend stays positive.
The second disaster is risking more than 10% per trade. Blame "The Big Short" partly for this one. That movie made everyone think trading success means going all-in on some massive bet. With a $100k account, risking $10k per trade means you're halfway to broke after just five losses. Yikes. The best traders I know never exceed 3-5% risk per position.
And don't get me started on max debit options trading risks! Holding positions until expiration hoping for a miracle? That's how accounts vanish.
The third killer is chasing headlines and getting emotionally attached to stocks. Instead, I use a relative outperformance watch list. Every Monday, we identify the strongest sectors and stocks. Recently, XLC (Communication Services) has been crushing it. By focusing on trend-followers in that sector and avoiding laggards, we find high probability trading opportunities for 2025 and beyond.
Trading discipline and timeframe selection matter too. Pick one timeframe per trade and stick with it. For day trades, I only use 5-minute charts. For swings, hourly or daily. For longer positions, weekly charts. Don't mix them up!
Look, success in trading takes many forms. But the ways people lose? Those are weirdly similar. By applying the Charlie Munger inversion technique to your trading mindset, you can sidestep these common trading mistakes.
Want more? Join our Sector Secrets Mastery community for 30 days for just $7. After 30+ years developing these risk management trading strategies, I'm pretty confident they'll help you avoid the big mistakes.
TL;DR: If you want to keep your trading account intact, master Charlie Munger’s inversion technique: identify and avoid the most common blowup mistakes (like ignoring the trend, betting too big, and chasing headlines). Build habits that guarantee survival, not just occasional wins.
