Monday, May 13, 2013

It's ok to be wrong

One thing that trend followers have to get used to is being wrong - frequently. When entering a position we have no idea of knowing whether the trade will go in our favour or not. So, on a sample size of one or ten trades, it is possible that you could lose on every one of those trades. However, if you are using a system that historically has a positive expectancy, then you can ride out those poor performing periods relatively unscathed, and wait to profit from future trades.

Being comfortable with being wrong means you can accept taking small losses, with minimal damage to your trading equity. There is no danger of allowing a small loss develop into a much bigger loss. You simply record the loss and then move onto finding the next opportunity.

By keeping losses small, even if they account for more than half of all your trades taken, mean that, when a profitable trend does come along, it can often cover those small losses, and leave some residual profit left over. Being able to do this can only be done if you:

a) Use proper risk control on each position, and
b) Are truly compatible with what you are trying to do.

If you are not, then you will be prone to 'self-sabotage' and will stay in positions that you should have closed, and will close positions that you should have stayed in.

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