Saturday, August 09, 2014

Become a good loser

I'm wrong way more often than I'm right, as are most trend followers. I've suffered abuse or ridicule in the past on bulletin boards due to my low win rate. That just shows a lack of understanding about how I (or other trend followers) go about their business.

The big difference is that, while a lot of my trades are losers (see this list) you will note that the vast majority of these losses are very small, and are generally taken quickly.

My whole approach is geared towards controlling risk, and keeping losses as small as possible. This means knowing when and where I am going to exit a losing trade (as well as a winning one) allied to risking only a small element of equity on each position. It is only by doing this can I achieve a positive expectancy with a low win rate. 

With losing trades, I will open the position when my entry price level is hit, but if it doesn't start to move in my favour, then I will get out pretty damn quick. I want to eliminate the possibility of a small loss becoming a big loss. I don't even wait for my initial stop to be hit - a lot of my losing trades are closed within 24 hours of being opened. This keeps me in the game, keeps my equity intact, and helps to avoid the stress that comes with big losses or drawdowns.

Failing to take a small loss, especially when price then moves back in your favour and generates a profit, is one of the most dangerous things you can do. You might get away with it once or twice, but the markets will ensure that the next time, you will suffer the mother of all losses. A lack of discipline, coupled with poor discipline will guarantee failure.
Getting people to accept that they are wrong on a trade, to bank the losses and move on is always a challenge, but something that is imperative if they want to succeed as a trader. Even if you believe in the underlying fundamental story on a stock, if price is moving against you then it is creating a very real loss (whether you take it or not!).
In other words, learning to be a good loser is part of becoming successful as a trader.

Don't want to take my word for it? Consider what the following individuals they have to say:
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong." - Bernard Baruch
"Being wrong is acceptable, staying wrong is unacceptable." - Mark Minvervini
 
"A loss never bothers me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does damage to the pocketbook and to the soul." - Jesse Livermore

It doesn’t matter if you’re trading stocks or soybeans. Trading is trading, and the name of the game is increasing your wealth. A trader’s job description is stunningly simple: Don’t lose money. This is of utmost importance to new traders, who are often told, Do your research. This is good advice, but should be considered carefully. Research alone won’t insure a profit, and at the end of the day, your main goal should be to make money, not to get an A in How to Read a Balance Sheet” - Richard Donchian

"The elements of good trading are cutting losses, cutting losses, and cutting losses." - Ed Seykota

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