Weekend Food For Thought – Mar 03, 2012

DEFENSIVE TRADING – LESSON 2

The market will give you what it wants

and it will take what it wants

And that is why I don’t bother with profits and instead place my focus on losses.

The market will give you whatever it feels like giving you. On a generous day, it’ll give you more than you bargained for. On other days, it’ll be stingy. One fact remains – you have no control over how much you can make.

The market will also help itself to what ever it wants from you. On a nasty day, it can wipe out your whole investment. On merciful days, the punishment is more tolerable. In this, another fact prevails – you do have control over how much you want to lose.

And that is why I don’t bother with profits and instead place my focus on losses. If I can’t control how much I make, then I might as well focus on how much I lose and make sure that I don’t lose more than I set out to lose before I took the trade. I always budget my trades. But contrary to what you might think, I don’t budget how much I lay out as a capital as much as budget how much of that capital I am willing to lose. And I never lose more than what I had budgeted to lose. This keeps me confident and keeps my account healthy.

Its very much like race driving. Novices prefer to know how fast the car can go but professional racers know how long it will take to bring the car to a stop safely.

Cut your losses early

and let your profits run.

Take a good look at that sentence and make sense of it.

Now ask yourself; where in that sentence does it imply that you can or should control your profits? It instead tells you that you should control your losses because you can. And since you have no control over your profits, allow it to run for as far as it will go.

It is your losses that you should keep consistent. Keep it consistently small because you will never know how much you will make in the next trade. This is why I insist that the profitable trader is the one who knows how to lose consistently.

Yet you will get gurus who will tell you things that only serve to conflict with your subconscious mind. They will confuse the hell out of your trading psychology in one mind-bogling sentence –

“Make consistent profits by cutting your losses early and letting your profits run.”

Read that carefully. If you don’t find that conflicting or confusing by now, you haven’t learnt anything here.

I much prefer to use the original Japanese version …

Lose as little as you can

and make as much as is allowed.

People often ask me what it takes to become part of the winning percentage. You see, it is widely accepted that the losers make up 90% of the market while the winners are the few 10% that make all that money that the 90% loses … and it is a lot of money.

My answer is a basic and slightly different take on the question;

If you don’t want to be part of the 90%, then don’t lose. If you don’t lose, you are likely to win. Even a small win puts you in the 10%.

And that is why I don’t bother with profits and instead place my focus on losses.

Happy Hunting!

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Comments

Well say mr conrad, waiting for the last two lesson :)

Spot on, sir. I trade better nowadays when I focus on minimizing my losses. Have to keep focusing on that.

well said, opened my mind in diffrent perspective, what i do on my earlier trading is opposite, consistent win, and run loss. if i can think on opposite, result will be diffrent.

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