Quite a few books and articles have been written about, how to make money in the markets. Some of them are even written by people., who made money themselves as traders! but, you don't often see Books or articles on, how to properly lose money when trading.
“Cut your losses and let your profits grow” is the most common advice. How to define, when the position becomes losing? Interesting, but most traders, whom I knew, could not clearly formulate the answer to this question, when you opened your positions. They focused on entering, but then, did not have a clear idea of the exit especially, if this exit was in the "red zone".
I am convinced, that one of the real problems is the difficulty of traders to separate the reality of a loss in a particular trade from the psychological perception of oneself as a loser. At a certain level of their development, many traders equate trading losses with personal failure. It upsets and depresses them, making them uneasy. Eventually, it affects their future decisions, because their gains and losses become arguments against their self-worth. As soon as trader starts to focus on himself, instead of concentrating on the market, distortions in trading decisions become inevitable.
A particularly valuable section of the classic book Memories of a Stock Market Participant describes Jesse Livermore's approach to buying stock.. He would sell a certain number of shares and look, how will the market react. Then, he would do it over and over, testing the existing demand for a given market instrument. When his sales could not move the market down, he would buy stocks aggressively, earning your profit.
I am impressed by this methodology that, that Livermore viewed one-off casualties as part of a larger plan. He didn't just lose money, he paid for information..
If my maximum position size is 10 lots, and I buy one lot at the upper border of the range, waiting for a breakthrough, then I just "test the water". I can potentially not move the market, like Livermore, but I am starting to test my hypothesis of a breakout of the upper boundary of the range.
I can then follow closely, how other closely related market instruments behave at the top of their ranges? How the market absorbs seller offers? Like any explorer, i collect data, to determine, is my hypothesis really confirmed.
Suppose, that there is no upward breakthrough, and the initial move above the range returns back to the range on some increased selling pressure. I accept a loss for my one lot, but what happens next?
Unlucky trader, probably, upset “Why do I always get caught buying at the highs? I can not belive it, that “they” moved the market specifically against me! It is impossible to trade in this market ”. Due to their frustration and the associated self-focus, the unlucky trader will not get any information from this trade.
but, successful trader, using the Livermore method, take a loss on one lot as part of a larger plan. If the market breaks up, it will increase the long position and, probably, will make money. If this one lot would bring a loss, then the trader would just pay for the information, what's in front of him, at least, range market, and he may try to find a pivot point and open a short position, to capitalize on the movement to the lower border of the existing range.
Look at it this way: if you make a deal with a high probability, and she turns out to be unable to bring you money, then you just paid for important information the market does not behave, how does he usually do it. If good economic news, which usually lead to the strengthening of the dollar, unable to budge and your purchase is thwarted, then you have just acquired useful information there is a lack of demand for dollars. This information can bring much more potential profit., than money, lost in the original transaction.
I recently read an article by former trader Everett Klipp, in which he shares not only his 50-year experience of successful trading on the exchange floor, but also with their experience of training more 100 Traders.
Talking about your short-term trading system, Clipp notices, “You must love to lose money and be uncomfortable, making a profit, to be successful in the long run. That, what i teach and practice, contrary to human nature. You must overcome your human nature ”.
Klipp's system was about quick profit taking (hence hate making money), but in an even faster taking loss (love to lose money). Instead of, to view losses as a threat, Clipp viewed them as an essential part of the trade.. He was convinced, that taking a small loss reinforces a trader's sense of discipline and self-control. Losses are not a trader's failure.
so, I suggest everyone, who makes a deal with a high probability, answer the question: “What will show me, that my deal is wrong, and how can i use this information, to make a profit later?”
If you are right about trading, then there are no losing trades only trades, who directly make money and transactions, which give you useful information, to make money later.
Brett Stinberger
