Monday, August 03, 2015

I love taking losses - do you?

I was reading another trend following blog the other day when I saw a comment along the lines of "as a trader, you will never be happy taking losses".

It might be my 'glass half full' type of thinking, but I actually take the opposite point of view. I love taking losses, especially when they are as small as possible. To me this means that:
  • I have been able to follow my rules without question;
  • I am adhering to one half of the basic premise of trend following - cutting losses and letting profits run;
  • by keeping losses as small as possible, I am keeping my equity as high as possible - this keeps my position size as large as it can be going forward;
  • it completely eliminates the possibility that a small loss can turn into a much bigger loss;
  • based on my historical win rate and positive expectancy metrics, I expect that the majority of my trades will be losers. Therefore, each loss brings me closer to a winning trade - may be a big winner.
My own rules relating to losses are well established and allow me to satisfy those points.

So what if you have a trade where you sitting in a profitable situation, only to see that eroded and you actually end up suffering a loss? To me its just one of those losing trades.

If you go back through the archives here, you will come across plenty of examples where I got stopped out pretty quickly when a breakout failed. To many (including me!), that can be frustrating. But, its part of the game. What I do know is that, on quite a few occasions, had I held on in the hope that price may move back in my favour, I would had suffered far greater losses as price decided to start moving rapidly in the opposite direction.

I actually believe that, to become a successful trader over the long term, you first have to learn how to lose. You don't want to see several months (if not years!) of hard earned profits being eroded simply because of a refusal to take a small loss when you had the chance.

This belief was reinforced again last year, when I suffered a horrendous run of losing trades. It is quite possible that, had I not been so keen on taking those losses as quickly as possible, the resultant drawdown would have been far worse than what it was. As it was, I was able to then fully eliminate that drawdown and get back to new equity highs in a relatively short period of time.

Knowing that helped reaffirm my love for taking losses.

Of course, this belief is backed up by my past performance, what other trend followers historical performance has been, and accepting that traders have to go through periods where the markets are not favourable towards their own style of trading. You also have to expect that 'Grade A' setups can fail, even when market conditions are good.

In other words, being fixated on each individual trade being a loser, or even a relatively small sample of trades creating a bunch of losing trades, is the wrong way to think. You have to accept that each trade is only one out of a sample of 1,000, 10,000 or even more trades. You need to focus on the process and not the outcome of each individual trade. Not easy to grasp in the beginning, but once you can, and combine it with good risk control, you have made a big leap forward.

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1 comment:

  1. I stumbled upon this topic via Google. Very interesting view on subject. Thanks for sharing.