Many traders seem to be on a quest to find the Holy Grail. It’s a clichè for sure, but by coaching traders I have seen many versions of the Holy Grail quest:
- looking for the perfect system that has a 90% win rate with small losses (which isn’t possible: a system with a large win rate is a negative skew trading model, and always has larger losses);
- even with a simple system like this one, many traders attempt to optimize the entry in an attempt to not lose;
- spending years on end learning everything in the public domain about trading systems and technical analysis - while failing to construct even a basic system;
- looking for the optimal profit target or Risk:Reward ratio;
- etc.
Of course you need a system. And of course you need to have an entry trigger to get you into the market. But what do the pro’s say? Where should your efforts really be directed?
The answer might surprise you.
There Are As Many Ways to Trade as There Are Traders
If we look to the Market Wizards for advice on “how to trade”, we get conflicting answers:
“I haven’t met a rich tecnician” - Jim Rogers
“I always laugh at people who say ‘I’ve never met a rich technician’. It is such an arrogant, nonsensical response. I used fundamentals for 9 years and then got rich as a technician.” - Marty Schwartz
“Diversify Your Investments” - Sir John Templeton
“Concentrate Your Investments” - Warren Buffett
“Don’t try to buy the bottom or sell the top” - Bernard Baruch
“I believe the very best money is made at the market turns” - Paul Tudor Jones
Evidently, there is dissent even amongst the top traders and investors in the world.
All Traders Agree on How to Deal with Losses
So it seems logical that there is no single best approach to the markets. There is no “best system”. In reality, the best system is the one that best suits your own beliefs about market movement.
Instead, there IS a consensus amongst the Market Wizards on how to deal with losses.
”I’m more concerned about controlling the downside. Learn to take
the losses. The most important thing in making money is not letting
your losses get out of hand” - Marty Schwartz
‘‘I’m always thinking about losing money as opposed to making
money. Don’t focus on making money; focus on protecting what you
have.” - Paul Tudor Jones
“One investor’s two rules of investing: 1. Never lose money. 2. Never forget rule #1.” - Warren Buffett
“Learn how to take losses quickly and cleanly. Don’t expect to be
right all the time. If you have a mistake, cut your loss as quickly as
possible. “ - Bernard Baruch
Learning how not to lose money is more important than learning how to make money because when traders lose money in the markets, they usually look for a new approach to make money!
Most traders ignore the probability of having consecutive losses, so they are not mentally prepared for them. There are 2 issues here:
- even with a 60% win rate, a trader can expect to have 5 consecutive losses over the next 100 trades;
- the win rate of a strategy oscillates over time, depending on market conditions: perhaps the average win rate is 60% over the course of a year, but each month the win rate may vary between 30% and 80%.
Instead, most traders think the previous method was defective - it wasn’t the trader’s fault. Here’s the trap: given the myriad of methods available, you could spend a lifetime trying, and failing, to make money with each one because you don’t know how not to lose.
On the other hand, if you learn why people lose and thereby control losses, profits will follow.
How to Lose Well
Losing well means distinguishing between the end result of making money and the goal of trading well. If you seek to trade well, money will follow (over time - not on each trade!).
Trading well means:
having developed or adopted a trading system you believe in;
having done the work to understand what you do well when you’re successful (and do more of that);
having done the work to understand what you do when you trade poorly (and avoid doing it);
The goal is to be consistent in trading well, following the system and adopting the best practices that help you execute the system well.
If you trade well but lose, it may be a message that market conditions are changing. That is useful information in itself. But if you aren’t following the rules for whatever reason and lose money, it’s hard to know what exactly went wrong. Every trader needs to focus on doing the right things and let the probabilities play themselves out.
The key, then, is not to perfect a trading system. The key is to perfect your understanding of the system and your execution of the system. This can only be done through concise journalling, learning more about yourself and your thoughts as you trade, and then connecting that to the results you obtain.
If you’re stuck or need guidance on how to do any of the above, just get in touch.