How to win from losing

samsonThe importance of what I’m going to explain today cannot be overstated. It’s quite simply the difference between people who win in the markets and people who lose…

Even when you do everything right, even when you take profits, you can still end up with a loss. Why? How is that possible? Can you go broke by taking profits?

Yes, you can go broke taking a profit. Let me explain…

You can, and sometimes will lose, even when you do everything right, every pro trader knows this. But you can still win overall if you’re disciplined.

And by disciplined, I mean this:

1. You find a strategy that works for you and you stick to it through thick and thin. If it works stick to it. If it doesn’t work for you, find a new one that will. The important thing is not to keep chopping and changing!

2. You ride your winners as long as possible, resisting the urge to take profits too early.

3. You cut your losses early at a predetermined level.

Easier said than done because this all runs completely counter to human nature!

When you see your trades tick into profit your emotions of greed will want to take the money out of fear that the profit could disappear the next day.

When you see your trades tick into a loss your emotions of fear will want you to not close the trade, out of denial and pride.

Cut your losers early and ride your winners as long as possible. On any given day you’ll look at your trading account and see some trades running a profit, and others running a loss. That’s normal, as things fluctuate. But what your temptation will be is to snatch those profits showing up and to leave the losses in place (hoping they too will be in profit soon). But that’s often the exact OPPOSITE thing that you should do. Do NOT underestimate this warning I give you!

Understanding trading is relatively easy. The hardest part is being able to take actions that are counterintuitive!

Try to think of it this way: your trading account is like a garden that you lovingly tend to. In any garden there will be parasitic weeds and blooming flowers. The job of the gardener is to remove the weeds, and nurture the flowers, right? So why would you do the opposite?

Cutting your winners and letting your losers ride is like ripping out blooming flowers and leaving the weeds in place!

Now, there of course will be right times to take profits and right times to let losers alone, my point is to explain how to be disciplined and not succumb to the wrong temptations that your human nature will see.

But to go back to the main point, you will win overall even if you lose half the time. In fact, you can even win if you lose MORE times than you win! Let me demonstrate how. Here are ten fictional trades showing profit or loss, in chronological order at which the trade occurred, starting with a $10,000 account Please put yourself in these shoes and experience all the emotions:

1. 10% loss. Account balance $9,000.

2. 10% loss. Account balance $8,100.

3. 10% loss. Account balance $7,290.

4. 10% loss. Account balance $6,561.

5. 10% loss. Account balance $5,905.

Okay, let’s pause before moving on to the next five trades. Your account is now down from $10,000 to $5,905. Wow, that was money well spent… not!

Had enough yet? Still believe this can work? The overall market is UP- you’d have been better off just buying the index! Do you have the discipline to sit this out? These are the questions that will mess with your mind and tempt you into doing something silly during times like this! And, thanks to Murphy’s Law, I often find that it’s soon after these times that the tide turns. It’s often darkest before dawn. Here are the next five trades…

6. 60% gain. Account balance $9,448.

7. 70% gain. Account balance $16,061.

8. 20% gain. Account balance $19,273.

9. 10% loss. Account balance $17,345.

10. 30% gain. Account balance $22,548. UP over 125%!

Listen, this is very important:

Just because you won on any given day doesn’t mean you did the right thing. And just because you lost on any given day doesn’t mean you did the wrong thing.

Do not judge your success by any short-term outcome, judge it by the decision-process you went through.

Go back and honestly ask yourself if you didn’t miss anything. If you’re truly doing all the right things and getting lousy results, you’re just having a run of bad luck (known as a ‘drawdown’). But the key word there is ‘truly’.

So in that demonstration you lost 6 trades out of 10 and you were still UP 125%. And I wasn’t being unrealistic on those gains, either. It’s like magic, isn’t it? How is this possible? The answer to that question is in the percentages of gain and loss that you saw…

It’s ONLY possible by letting your winners ride and cutting your losers early! You WILL lose some, maybe half or even more of the trades. And if you cut your winners early and ride your losers late, the winners will NOT make up for the losers. Result: LOSS.

That’s how to win from losing.

Best,

Jim.

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  1. John Chapman

    Just so. I like to think I’m disciplined, airing on the cautious side, but occasionally I see that trade I just can not resist and I get caught, so this reminder is well received.
    Thankyou, John

    Reply

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