Tuesday, July 24, 2012

Knowing every trade can lose

I once told a friend of mine that I win 70% of my trades. He was so excited. He decided to try out my strategies. And he was so honest that he took all the trades that I took. And guess what, some were losers and some were winners. In two weeks, most of the trades we took actually lost. We were down by about -200 pips. I recall him telling me how I had deceived him. How I was dishonest. And you know, I never believe in showing my history trades. I prefer people to rate my trading on current trades not past history. So indeed, in those two weeks, we were in -200 pips. It was not cool but I was comfortable with it.
My friend was bitter. He felt betrayed. I could tell by the anger in his voice. He wanted to grow his account. He wanted to grow it now. He had lost a lot of money before. He never wanted a loss. He wanted 70% wins. Yet here in two weeks, we had more losses than wins. We were in fact in negatives. What kind of 70% success was this?? I tried to explain to him (which I rarely do since I prefer the account to speak for itself) but that did not help either. To him, I was a loser and liar and he in fact told me that he will never use my trading method (price action) ever again.

You see, 70% of wins does not say which particular trade will be a winner and which trade will be a loser. In my mind, every trade can lose – no matter the setup, no matter the conditions. That is why I expose what I am comfortable and willing to lose. Maybe because I understand that I cannot control the markets in the same way a farmer never tries to control the weather when he tills the land. He always plants in the best season yet he has no control over the winds, the storms, the hailstones, the rains and the drought, but he still tills the land and plants his crops in the best season.

Likewise, in trading, any trade can lose, we have no control over the markets. Just like the farmer, we have to trade when our edge exists (best season) but after placing the trade (planting) we cannot control the markets (the weather), like the farmer, we have to be ready to harvest or to accept the loss and plant in the next season. 

And when it happens that for two weeks, you have only sunshine (negative pips) what do you do?
That is when my friend gave up. He expected the results there and then. Knowing that every trade can lose and exposing only what you are willing to lose is a better way to trade. At times the edge is present and right but the trade can still go against you. Also winning 10 trades in row does not mean that you are now a pro at trading.

The beauty about trading is that you never know which of your trades will be winners or losers. We expect all to be winners but we also know that some will be losers. And since we don’t know what particular trade will be a winner or a loser, better to accord each and every trade the possibility that it can be a winner or loser and not to get over excited or disappointed if any of the two options happens.

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