Trading commentary

Losing to Win



Losing to Win – Trading Commentary

I sometimes sense from email correspondence I receive from the Factor community that there is an obsession in being “Right” when trading or put another way, concern that their analysis might be “wrong.”

Running the risk of offending, this worry about being right or wrong on a trade or an analysis puts up a major red flag in my mind.

I learned early on at the Chicago Board of Trade that the road to long-term profits runs through the city of Losses.

Worry or concern that a trade will be a loser is a major hurdle to profitability.

Professional traders understand that the goal of trading is to make money, not to be right. Making money in the markets requires losses — a lot of losses. Most traders I know are right no more than 40% or 50% of the time — this means they are wrong and take losses on 50% to 60% of their trades. Being wrong is part of trading. It comes with the territory. My default frame of mind as I enter any trade is that it will be a loser.

One of the major mistakes made by novice traders is that their bet size is much too large — often they risk 5%, 10%, or more of their capital on an individual trade. At this bet level I, too, would be worried about being wrong. Betting 10% of your capital on each trade is a sure way to wipe out your trading account. Someday I will explain why statistical probability will lead to ruin, but not today.

It is the fear of losses that leads many novice traders in search of holy grail trading systems that promise to be right on 80% or more of the time. Good luck with that one. If you are in possession of such a system and it delivers on the promise, then you are smarter than am I.

If the fear of losing characterizes your trading, then I offer a couple of thoughts.

First, settle on how you plan to trade and handle risk management, then paper trade for a year or so.

Second, when you begin to trade real money, risk no more than 30 to 50 basis points on each trade.

Third, if you have too small of an account to permit a risk as little as 50 BP, then you might think about endeavors other than trading.

There is a fine line between being fearful of the markets and having well-deserved respect for how much damage the markets can deliver to carelessness. You need to be on one side of this spectrum or the other. Being on the side of fearfulness is something that can be overcome — and that is the good news.

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