Perception losses

Quite a lot of books and articles have been written about how to make money on the markets. Some of them are even written by people who themselves were making money as a trader! However, you do not often see a book or article on how to properly lose money when trading.

“Cut your losses and let profits run” is the most common advice. How do we determine when the position becomes a lose-lose? It is interesting, but most traders, whom I knew, could not articulate an answer to this question, when you opened your position. They concentrated on the entrance, but then did not have a clear idea about exit especially if the output was in a “red zone”.

I am convinced that one of the real problems is the difficulty of traders to separate the reality of the loss in a particular transaction from the psychological perception of yourself as a loser. At a certain level of development, many traders equate trade losses with a personal failure. It frustrates and depresses them, causing them discomfort. As a result, it affects their future decisions, because their profit and loss turn into arguments against their self-esteem. Once the trader starts to focus on themselves, instead of concentration on the market is distorted when making trading decisions are inevitable.

Especially valuable part of the classical book “Recollections of a member of the stock market” describes the approach of Jesse Livermore to buy shares. He would have sold a certain number of shares and see how the market reacts. Then, he would have done it again and again, testing the existing demand for this market instruments. When the sale could not move the market down, he would aggressively buy the stock, earning profits.

I am impressed by this methodology is that Livermore considered one-time losses as part of a large-scale plan. He did not just lose the money he paid for the information.

If my maximum position size is 10 lots, and I make a purchase of one lot at the top of the range, waiting for a breakthrough, I just “check the water.” I potentially can not move the market, like Livermore , but I’m beginning to test my hypothesis breaking the upper limit of the range.

I can then monitor closely how other similar market instruments behave at the upper limit of its range? As the market absorbs supply vendors? Like any researcher, I collect data to determine whether my hypothesis is confirmed.

Suppose that there is no break up, and the initial movement above the range of returns in the range of some increase in pressure sales. I accept the loss of my one lot, but what happens next?

The unsuccessful trader is likely to be upset “Why do I always get to purchase a maximum? I can not believe that “they” moved the market especially against me! In this market it is impossible to trade. ” Because of his illness and the related focus on themselves, an unsuccessful trader is not can gain any information from this transaction.

However, a successful trader, acting by Livermore , accept the loss on one lot as part of a larger plan. If the market made a break up, it will increase the long position and will likely make money. If this one lot would bring a loss, the trader would have paid just for the information in front of him, at least, band market, and it may try to find the pivot point and take a short position to earn a move to the lower boundary of the existing range.

Look at it this way: if you sign a deal with a high probability, and it has not been able to bring you money, you only pay for the important information the market is not behaving as it does normally. If good economic news, which usually lead to the strengthening of the dollar, not in a position to move the rate up and your purchase goes wrong, then you have just acquired useful information there is a lack of demand for dollars. This information can bring far more profit potential than the money lost in the initial transaction.

I recently read an article by a former trader Everett Clipp, in which he shares not only his 50 years of successful trading in the stock room, but also their experience in training more than 100 traders.

Speaking about his own system of short-term trading, Clipp observes, “You must love to lose money and uncomfortable, making profits, to be successful in the long term. What I teach and practice is contrary to human nature. You have to overcome their human nature. ”

System Clipp was fast taking the profits (and therefore hate to make money), but even more rapid capture of losses (like to lose money). Instead of treating the loss as a threat, Clipp regarded them as an essential part trade. He was convinced that taking a small loss strengthens the sense of discipline and self-control trader. Losses are not a failure trader.

So, I propose that everyone who makes a deal with a high probability, to answer the question: “What tells me that my transaction is incorrect, and how I can use this information to make a profit later?”

If you have the right attitude to trade, there was no losing trades only deals that directly make money and deals that give you useful information to make money later.

Brett Stinberger

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nyse    Articles     breakthrough, classical book, concentration, decisions, how to make money, jesse livermore, loser, making money, market instruments, maximum position, methodology, personal failure, profit and loss, profits, psychological perception, recollections, red zone, self esteem, stock market, trade losses

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