Thoughts on Trading
Winning By Losing
The key to succeeding in trading is to lose well. It doesn't matter if you are a die hard fundamentalist who thinks that chart reading is akin to astrology or an unrepentant technician who thinks that all news flow has less value than celebrity gossip. Every great trader I ever met knew how to control risk which is simply a polite way of saying that they knew how to take losses.
Of course losing is not what every newbie trader focuses on. Everybody wants to win big. Everybody approaches trading as though it was a lottery not a business. I am always amused by new traders who email me for the next 10 point trade and the next one and the next one after that thinking that the FX market is like a massive ATM machine. Those traders usually have a shorter shelf life than a half eaten apple.
On the other hand, traders that approach the market with a much more cautious attitude tend to do better. They soon learn that in trading losing is the only variable that you can control. Winning is frequently a function of luck, but losing is always a matter of skill.
Everybody hates stops. What's even worse is to be stopped two, three, four times in a row. In a debate between tight stops and wide stops I used to always hear "You don't want to die a death of a thousand cuts!" Well actually I do. After years of trading I came to the conclusion that tight stops will keep me in the game. I may be bloodied, I may be hobbled but I will remain alive to trade another day. In a choice between taking many small measured stops versus a few very large ones I will always choose the former because large stops can frequently turn into catastrophic losses, and much as it is unpleasant to lose money, it is always easier to recoup a series of small losses rather several huge ones.
Recouping is what trading is actually all about. Everybody who begins trading envisions an ever climbing equity curve that builds with the consistency of a weekly paycheck. Nothing can be further from the truth. In reality trading is always the act of giving money back to the market and then trying to claw it back.
Trading is tough precisely because it is so brutal. Unlike a job that pays us even if we are sick or distracted or simply not in the mood to do our best, trading promises you nothing. You lose, you don't eat. That's why I have such enormous respect for those traders who make their living solely from the market. They are the gladiators of modern finance and the ones that survive always know how to take a stop. The rest of us must learn those skills.
The need to build wealth through trading is greater now than at any time in the past 50 years. Does anyone who is 40 or younger believe that Social Security will pay them anything? How about your decimated 401K plans that are likely to range trade for the next 10 years as stocks cycle much like they did in the 1970's? Bonds? Good luck trying to fund your retirement with 2% yields.
Bottom line is that in the next decade trading may be the only avenue left to build wealth with your savings. That's why it is more important than ever to master key principle of the game - in order to win in trading you must learn how to lose properly.