Much of Trading Is Learning How To Lose

Trading losses are guaranteed, yet for some reason, new or struggling traders seem surprised when they happen. Rather than accepting risk, new or struggling traders trader will move or cancel a stop-loss just as it was about to get hit. This is not only a bad trading habit, it also sign of what medical community call ‘’impending doom’’. Traders that engaged in this bad trading habit fail to understand is that money is not made through (guru’s or one’s) opinions, or by the complexity of a tactics, neither is it made by how timely you were able to enter the market. Money is made at EXIT.

A Game Of Exit

’If you put in stops and run your profits and trade randomly you make money; and if you put in targets and no stops, and you trade randomly you lose money. …the old saying about cutting losses and running profits has some truth to it.’’ — — — David Harding

I often use to play an exit game with my mentees where everyone enters a series of trades using a simple system.

  • The system decide whether to go long or short the market by looking at weakness or strength in US Dollar against at G10 currency.
  • If dollar is weak across the G-10 currencies, we buy the strongest currency against dollar.
  • If dollar is strong across the G-10, we sell the weakest against US Dollar.
  • Each trader is given exact same entry price for each new signal.
  • Each trader implements their own exit strategy.
  • No Over Night trade. Trade are open and close same day.

After about fifty trades, the results typically range from one extreme to the other. A few traders make a lot of money; a few lose a lot of money and most fall somewhere in between. It is rare for any two players to have the same results. The point of this simple exercise is to illustrate the effect of exits on our trading results. In this game everyone has identical entries yet the final performance of the trading ranges from large losses to large profits.

Key Lessons

Exits determine the outcome of our trading far more than anyone realizes. In fact, the experiment shows that exits have more impact on the results of a system than any other factor, including position sizing.

  • We found that holding trades past the stop loss, or in fact having no stop loss at all, proved to be a terrible exit strategy, and possibly the last trade that person ever does depending on how long they held on and volatility.
  • Only a delusional trader never expect to have loss. Loss, like pain is inevitable. Our struggle to avoid loss is the source of all the abstract constructs we put around price.
  • The performance data shows that even a minor variation of the exit strategy would drastically affect the number of trades, the percentage of winners and losers, the size of the draw-down and the total profitability.
  • Markets change their behavior faster than people can change their minds. Hoping and praying market will reverse or conform to one’s opinion is why trading is so difficult. In other words, the core problem of traders is not finding the right strategy but their need to be right. That makes it difficult to quickly accept losses, and it makes it especially difficult to flip their’s views.
How many traders do you know who can accept being wrong? How many traders do you know who can be wrong and lose money? How many traders do you know who can be wrong, lose money and not feel bad? How many traders do you know who can be wrong, lose money, not feel bad and reverse their position? How many traders do you know who can be wrong, lose money, not feel bad, and reverse their position quickly? Don Chase
  • My conclusion is that the primary purpose of entry timing is to get the trade started in the right direction as accurately as possible. Everything that happens after the entry is determined by exit strategies.

How to use this Insight.

Give Yourself a ton of Room for Failure.

8 out of 20 trades failed for me. That was fine because when I hit a winner it won #bigly. I’ve gone through streaks of 20 failed trades in a row and the urge to tinker with the trading plan or tactic can be tempting when you are in a draw-down of more than 20%. You’ve got to be able to survive those moments to reinforce confidence in yourself and faith in your approach to trading. it is indisputable trading is confidence. However, confidence is not given, it is earn. My recommendation would be to risk 0.5% (or less) of the money you’re willing to lose on each trade with 1:20 leverage. That gives you greater chances for failed trades before you go bust.

Know the Point Where your Idea is Wrong

If only many traders have very a good and specific idea of where their trade idea will be proved wrong by Mr Market and have the courage to stick to plan, much of the stress and woes experience in trading will be minimized. Knowing the point where your idea is wrong start from studying exit strategy. For example, if AUDUSD is showing weakness, and you sold at 1.0755. Exit condition might be if AUDUSD exceed it 2 ATR from entry, you are wrong about the suggested weakness in $AUDUSD. There are variety of exit tactic. Google can help.

Keep Records of Your Winners.

Start studying your winners and stop fretting over spilled milk. You need to start by keeping or creating a record of your winning trades. You must also keep a record of the total number of bars in the trade from entry to exit. This way you can compute your average holding period when you are in profit. This hindsight can help identify the best possible exit point within your theoretical holding period. As an example, lets assume that you are in a profitable trade that have lasted 12 bars from entry. If your average holding period is 15 bars for the last 20 trades. this suggest existing at 12 bar is too early and existing at 21 bars is overdue.

Get A Working Trading Plan

Dependable trading revenue is a direct result of having a structure for producing winning trades. If you’re winging it” you don’t have a plan. If you are inconsistent, you don’t have a plan. If you have a plan and you’re inconsistent, my guess is you have more than one strategy.

Stick to one strategy, test it, improve it and and own it before you move on to multiple strategies. Before a trader can accept losses flawlessly, they need to believe they can produce profits. Otherwise every loss is a life and death, roller coaster of emotions.

To produce profits, consistent profits, and then big profits, you need an edge, a strategy that gets molded and adjusted into a trading plan that matches your unique goals and resources.

When a trader reaches this stage, trading losses are a business expense. Expected and accepted.

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