Simple Trading Basics, Simple Trading Psychology, Simple Trading Strategy

When Losses Are Better Than Wins

Old School Professional Trader

Consistently profitable trading requires a professional mindset no matter what strategy or timeframe you trade. By professional mindset I mean taking appropriate risk/reward trades and conducting the process in a business like manner. You spend (or should spend) most of your time searching/waiting for low risk opportunities to profit.

Whether a position, swing or intraday trader, the goal is the same… to repeatedly take good risk profile trades which should, over time, add money to your bottom line through the magic of compounding. Having the correct mindset is an integral part of the process.

All Profits Are Not Good

You might think that any trade that makes you money is a “good trade.”

Nothing is further from the truth.

Granted adding money to your account is never all bad, but a consistently profitable trader dislikes profitable trades that he doesn’t understand… and he REALLY dislikes “lucky” trades.  In fact, a real trader prefers a small, quick loss to a small win, all else being equal.

Why you ask?

It’s simple…

How do you replicate a successful trade which you don’t understand?  You don’t know which variables and in what combination led to the result, so there is no way for you to do it again.  This, by definition removes confidence from your trading.  

Don’t believe me?  

Think, for a moment about your test taking days (assuming you’ve left them behind).  How different did you feel entering a test for which you were well prepared versus one for which you had done no preparation at all?  How did you feel on each question?  When you were prepared, your confidence likely grew with each question answered.  When you weren’t prepared, there was likely only trepidation and repeated prayers for it to end.

Consecutive Losses

This phenomenon applies directly to trading… When you have a verified, well considered strategy, each trade builds your confidence as it falls within the bands of results you expect.  If you expect your strategy to suffer 3 to 4 small losses for every significant win, you are not unnerved by 4 small losses in a row.  In fact, 5 or 6 consecutive losses won’t rock your confidence (assuming they are small and your expected wins large enough).

This is why, “lucky” trades are a scourge to profitable traders because they muddy the waters with respect to the trader’s expected results.  Is it an outlier or is this a common result for which I haven’t accounted?  The fear is that it’s the latter because if there is one result for which you are unprepared…

Finally, “lucky” trades subtly encourage even the most disciplined trader to engage in risky and/or unsound trading practices like doubling down and/or trading without a stop.  

“Go ahead and double down…it worked out pretty well last time didn’t it?” Before a trader knows it, she’s playing Roulette instead of Poker… ignoring the prerequisites for a good trade and moving her stops… if she uses them at all.  She’s lost the professional mindset. 

Not to mention her mind.

$10 Runs

Need an example?  

I have a buddy who day trades a big dollar value stock exclusively.  He’s currently willing to lose $1.93 per trade as his simple approach frequently catches $10+ moves in the stock.  He’s willing to take several losses in a row (up to 4 in a day) as he knows the next $10+ run is right around the corner.  He has been doing some variation of this for more than 9 years and is quite happy with it.  He knows that he need only execute his strategy properly and the results will take care of themselves.  He has a professional mindset.

It Really Is Simple

Do yourself a favor… Treat your trading with the respect it deserves by approaching it as a professional… or at least professionally.

You’ll be glad you did.

Tell your peeps...

Leave a Reply