Saturday, June 15, 2013

It's boring and why I don't care about losing

Every weekday Mr Market opens up for business, enticing you to participate. You get price quotes flashing up on screens screaming at you - "Do something!". Turn on CNBC or Bloomberg and you get lots of people spouting opinions about what both the general markets and individual companies are up to, or even what they may do in the future.
 But beware - you need to be cold blooded when taking part in this game. Emotion should be kept out of your decisions. Don't trade for excitement - trade to win.

Ok - how do you win? By learning to lose.

Come again??? I'm not talking in riddles - seriously. The best traders learn how to lose.

So what happens if you are wrong on a position?

The answer is so simple it's scary. If you suffer a loss, close the position, and move on. Get over it. Forget it.

Trend followers in particular get very good at losing. They often lose more than 50% of the time, yet they end up winning.

It becomes ingrained in them to keep their losses as small as possible. Trading small positions relative to their equity helps. Also allied to that is the fact that they are able to see clearly when price is moving against them, or their system. They have stops in place that, when hit, tell them they are wrong.

I couldn't care less about losing on the majority of my trades. Why should I? My system rules take me out of the position - and as mentioned above , these losses are always for only a small percentage of my equity. They ensure I do not allow a small loss become a bigger loss.

They make sure I only lose the battle, but not the war.

Fine, so how do you win the war?

Well that's the trickier part for a lot of traders. When you are winning, you make sure you don't cash your chips in too early. You let the trade play itself out. To do this, you will need more discipline combined with patience.

You have an exit strategy when you are losing. You also have an exit strategy when you are winning, but you never try and predict when that point will come, either in terms of length of time, or the magnitude of the price move.

That way, your winning trades can end up being bigger than your losing trades - sometimes, a lot bigger.

All this gets wrapped up in a concept called expectancy and the letter R (click here for more). If it's positive, you can win. If it's negative, you will lose.

So, to summarise, get used to losing small and often. Get used to occasionally winning small. And, every once in a while, you'll hit a big winner. And that, in a nutshell, is trend following.

To learn more on how I can help you achieve this, go here.

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