A quick hit: Winning while losing
Key Points
- Just a short "thought piece" for today
- Losing trades are a "fact of trading life"
- How you manage losing trades - both financially and psychologically - will ultimately determine your success as a trader
Your #1 job as a trader
For the record, I come from a futures trading background. So - to paraphrase - I've seen some "stuff". I've seen people go from rags to riches. And I've seen people go from riches to rags. And yes, sadly, I have seen people do both. This experience is the reason why Rule #1 goes like this:
Jay's Trading Maxim #1: Your #1 job as a trader is to be able to come back and be a trader again tomorrow.
Sounds pretty obvious. But the reality is that once you take a huge hit financially, it becomes exponentially harder to bounce back financially and psychologically (Foreshadowing: The key is to avoid the huge hit in the first place).
I knew a commodity broker many years ago, a guy in New Orleans named Mike. And despite being a commodity broker, he was a great guy (go figure). Anyway, whenever he opened a new account, he would offer the new client his "Trade Guarantee". It went like this - "I guarantee you that there will be losing trades."
This was probably not what a lot of people wanted to hear, but the truth is that he did them a gigantic favor by properly setting expectations. This also dovetails nicely with:
Jay's Trading Maxim #5: It's not how much you make when everything goes right that matters; it's how much you keep when everything goes wrong.
The elephant in the trading room: Losing Trades
Let's be blunt, losing trades suck. Financially, of course, but even more so sometimes mentally. When you put a lot of time, effort, and energy - not to mention your "best thinking" into finding just the "right" trading opportunity, and then you get into a trade and the market laughs in your face and almost immediately runs in the wrong direction - it hurts (especially if you don't cut the loss at a manageable amount). Well, at least if you let it. Which leads to:
Jay's Trading Maxim #16: What happens to your account equity during a losing trade can impact your ability to trade effectively in the near term. What happens between your ears during (and following) a losing trade can affect your ability to trade effectively in the long term.
Which leads to:
Jay's Trading Maxim #33: Successful traders, a) control risk ruthlessly, and b) have short memories when it comes to losing trades.
The bottom line: What separates the majority of successful traders I have encountered over the years from everyone else is their willingness to spend more time thinking about, preparing for, and planning to mitigate the effects of a losing trade-and then not giving a second thought to a properly managed losing trade once it is over.
Which leads to:
Jay's Trading Maxim #26: The day you experience absolutely no emotion as you are stopped out of a properly managed losing trade is the day you gain the potential to become wildly successful in the markets.
Think about it.