Sunday, December 23, 2012

Acceptance of losses

When people make a profit from their trading activities they like to say "I was right". Yet when the same people lose money, or a position goes against them, they like to say "The market is wrong".

Accepting that you can (and will) make mistakes, or simply be proven wrong when putting money on the line is a critical phase in the development of a trader. Failure to accept you are wrong on a position will end up with small losses growing into bigger losses, and in extreme cases to a significant erosion of your capital, or even blowing up your account.

The bottom line, whether you win or lose on a trade, is that you have traded your beliefs or methodology on whether the price movement will move up or down, and the market has either moved in your favour or against you. It is perfectly acceptable (I would say essential) to admit you are wrong and take your losses, before moving on and waiting for the next set up.

Remember that the market and its movement are the sum of all the investing and trading decisions being taken by everyone participating in the markets, wherever they are in the world. The market does not care whether you are right or wrong. You cannot predict what the other participants will do, their reasons for buying for selling. Everyone has different reasons (fundamental or technical), different timeframes etc.

Over several years, I have averaged being wrong on 50% of my trades (some periods a lot more than that, some a lot less), yet have been able to make profits. I do not care if I lose on a trade - it brings me one trade closer to a winning trade, maybe even a big winner. So, I accept I was wrong, heed my stops, and treat the losses as a cost of doing business.

1 comment:

  1. Thanks for sharing your thoughts. Keep up the good job in posting very good topics.