Managing Losing Trades
Losing is a necessary part of successful trading. Everyone seems to have this infatuation with always winning and never losing. The problem is in trading there is no such thing as a no lose system or methodology. In fact, losing is a very necessary part of good trading. Successful trading is a game of probabilities and statistics. Understanding the simple math behind it is a necessity.
Many extremely profitable trading systems have a higher percentage of losing trades than winning trades. Now you may be asking yourself, how is that possible? It is possible because the average winning trade is 3-4 times the size of the average losing trade. The key is to think in statistical terms and probabilities and understand how that math bears out. Once that sinks in you have a chance, until then your ego is going to fight you every step of the way.
This concept is alone, losing more often, makes it very difficult for many people to succeed at trading. Their ego just cannot handle it. In trading, it is often the case of being right more often than you are wrong and losing money or being wrong more than you are right and making money. Yeah, yeah, I know it’s not an easy concept to grasp, but it’s the truth.
Spread betting is like every other form of gambling, there are do’s and don’ts. Here are some pitfalls to avoid….
- Expect losses. Because your trading and the markets are based on probabilities, there is a real possibility that your reasoned analysis will be wrong. For this reason losses are a normal part of trading and recognising that you will have losing trades is the first step towards controlling your emotions. Each time you open a new trade, you need to imagine the market going against you, hitting your stop loss and you losing that money in the process. If you feel comfortable (can anyone feel comfortable with losses?, but well that’s the best way we could put it) with that loss, then you are already half way to keeping your emotions under control. You have to repeat this procedure every time you trade. Naturally we always want to have winning trades, but you need to be able to stomach the losses both financially and mentally.
- Also, don’t get married to a particular view until you get confirmation from the market. And even then, don’t be surprised if your opinion turns out to be wrong. This applies in particular when you are trading with the herd. Most of use get so involved in the zeal of a market viewpoint that we tend to end up missing the key turning points.
- Be wary of the psychological effect that running losses can have on your state of mind. The fact that you can see big red numbers stating your loss has you reacting in a very different way than if you’d bought shares and checked them to discover they’d gone down slightly in value. It’s all about perspective, and when you have an exposure to a stock of £10k and you’re down £100, it’s not exactly a big deal…and that’ll usually happen before you end up in profit anyway. But when you see -£100 in red numbers and a date that your position expires on, you think ‘s***, this is serious’. It took me a while to get over that mindset.
- Another prized mistake is holding on to your losing position hoping and praying the market will turn. Sure, there will be times when it will come back into profit, but the problem of this, is that it reinforces bad behaviour. Next time a similar situation occurs, the temptation will again be to hang on, rather than cut losses short, also while you sat there concentrating on this coming back to break even, you are missing other opportunities. There is also a danger that sooner or later – hopefully later – you will pick something that will continue going down, and you will be thinking, this will come back like last time, and it just won’t. Best to plan your trade before getting in and setting a stoploss. Even people who don’t like setting stops with shares need to think seriously about doing this when using leverage or you could get mauled. Top traders can make good money by only making money on half their trades, or even less. The secret is to cut your losers quickly and limit losses while letting your winners run. Spread Betting is for the short term so if your position moves against you immediately and keeps going away from you, admit you got it wrong and shut it down. Short term trades are for short term considerations. If you put on a position and it keeps losing day after day that should tell you something.
- Even worse than holding to a losing position is adding to a losing trade (by averaging down which is the opposite of pyramiding). Day trading or closing positions within a few days can be very profitable when the markets go in the direction of your trade. It is just when one goes against you and you start doubling up…please be very careful. For example: Buy at say 50p, price drops to 40p so instead of letting a stop loss kick in, I instead bought MORE at a ‘bargain’ price, only then to watch it slide further south. So don’t buy just because the price is low or because it has gone lower after your initial purchase (there is usually a reason for this); likewise don’t sell just because the price is high. Have a good reason for getting into every trade. Recall, the markets are always right…
- Losing streaks. No matter how good you are at some point you will encounter losing streaks meaning that you will lose several times in a row. Suppose you just place on bet every day and your system is such that you have a 55% chance of winning; you have about a 70% likelihood of getting 5 consecutive losses in just your first. If you don’t bet sufficiently small to be able to ride this losing streak you can easily end up to the cleaners. This is why you should never risk more than 2 to 3% on any one trade.
- Likewise following the crowd can be a mistake – if you’re looking for a tip I will pass on one from Lt Frank Drebben ‘In boxing; never bet on the white guy’. When everyone starts to think that buying gold is a good investment, it might be time to sell. The public is usually wrong and market corrections usually happen when people least expect them. Always know why you’re in a trading position. Just because your pal at the pub holds shares in Tesco is not justification for you doing the same.
- With no plan…you plan to fail. Speak to as many people as possible – but be aware of what their background is – that goes for discussion forums as well. Would you really listen to what some guy down the pub says you should do? Do your homework and decide yourself and formulate a plan after investigating well. Part of this is also KNOWING how much you have to trade…so learn to budget and find out exactly what your disposable income is and make a provision for investment in your budget.
- Some fools trade with credit…well these are Darwin award gold medalists in my view. And do not believe the idiots bragging about £10k trades per point on the daily FTSE…they are fooling nobody…especially if they are relatively unknown.
- One word of warning to those unfortunate enough to be involved in a company where fraud by insiders is involved. As soon as it becomes clear that directors are stealing from the company or are deliberately misleading investors don’t call FCA / Regulators / lawyers / the shareholder action group / the police, call your broker and say SELL NOW. There is no reverse Newtonian law that says what goes down must go up. Averaging down to try to get money back is a complete mug’s game. People who say you only really lose when you sell do not know what they are talking about. Do not worry that the share price might bounce after you sell, it may well do, but the chances of you calling it right and not just losing more money are slim. Never hang on to vote at an AGM / EGM, it makes no difference. Always vote with your feet and sell. If you still want to cause grief as a shareholder then just keep a tiny amount so you can remain a shareholder and still give them grief.
- And remember ‘trading is tough tough’…if it was easy everyone would be doing it…the multitude of spreadbetting companies out there should prove that it’s a successful business model… A formal business education can help you understand economics and how the market works in general but it still won’t give you any guarantees of success in trading. In fact, most of the knowledge you acquired in college won’t give you the skill necessary to be successful. What you need is to recognise opportunity when others see none and you must try to find the information which provides you with the knowledge necessary for success in trading.
- All those tips are INVALUABLE but most of you will still not take any notice because you have to ‘feel’ the pain to learn; in other words you need practical experience. In fact, nothing beats the school of hard knocks – getting your head beated in by the stock market. You certainly get a progress report very quickly! Medical students read study materials, but it still takes years of practical experience to become a doctor. So be patient; read, learn, plan, practice and apply – and finally learn from your mistakes. We tend to follow a pattern of making the same mistakes in life so if you can stop them and learn from them the profits should then follow. Just keep in mind, trading is not something you can ultimately, you have to constantly evolve and learn.
- And finally take responsibility for your success or failures! Don’t take it out on the spread firms! After a bad day on the spreads we can all feel like kicking the cat, in fact it can help you feel better. But own up. Which one of you was it, who, after a bad day, decided to burn down the Spreadex offices?
We been broken down
They slipped me again, I couldn’t get out
it went the wrong way, the news was leaked out
the broker is bent, the prices are wrong
they took all my rent, I’m short – it went long
Its not down to me, its me that they shaft
it isn’t my fault, the brokers? – they laughed
when i took the trade I knew I was right
but didn’t realize that my broker was shytte
I am a good trader, I know what to do
but my money is gone now – like crap down a loo
I know that I’m right – I’m right all the time
Its the brokers who screw me, now I don’t have a dime.
Next week will be better, I’ll know what to do
I’ll go the right way next time, my broker is new
If I can just get and win a few days
I’ll be back on top with my superior ways.
And here I am now, ready and able
I’m long in the market, lots of cash on the table
Its going my way, I cannot fail
but oh no, it’s turning (I begin to wail)
It looked like a long – the news was all good
but it’s going down, my guts feel like mud
I took the chance and its starting to rain
and I know it’s those Bustards brokers again!
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