Hi Win!
I hope I am not breaking any etiquette here by “chiming in” here already? Especially as I do not fit the “wise” criterion mentioned above?
But I just wanted to add a thought on a terms “loss” and “trading” as in
In my opinion, this topic is all about “wrong turnings”.
And I think the most basic “wrong turning” is not understanding what retail trading is.
If you ask any trader what they trade they will usually instantly and confidently reply EU or GU or UJ or Oil or Indices or Crypto, etc. But these are all wrong answers. We do not trade these at all.
If we exclude options, then we all trade the same thing - probabilities, that is all. We take a risk exposure on the view that price is going to be somewhere else later compared with where it is when we take the trade. This mechanism is the same whatever instrument or time frame or strategy we utilise to create this risk exposure.
So the first “wrong turning” is to assume that when our trade loses, we got it wrong. Probability means something less than 100%. And less than 100% means a proportion of trades are going to be losses.
The next “wrong turning” is not understanding why we trade at all. The only sane explanation is the possibility of earning rewards sufficiently greater than those available in 100% investments to make the risk worthwhile. If one does not understand that higher opportunities also carries higher risks then one cannot understand that losses are just part of the process and not a mistake.
The next “wrong turning” is that if one cannot accept that losses are inevitable and only an overhead cost in the pursuit of greater gains, then they should put their funds into US govt securities instead.
So if we reach the point of accepting losses as being just as normal as gains, then we can be unemotional about them…or can we? Why do we then see revenge trading, etc? Here, I think, we find more “wrong turnings”
Let’s say we have a car with a full tank of fuel and we set out on a trip to a place where we really want to go. But we have no map and no navigator. But we have a good basic idea in which direction to set off.
So we travel along the road and all looks and feels good. But each time we come to a junction we have to decide, as best we can, on the indications available, which way to turn. We make our “best choice”.
But sometimes, inevitably, we take a “wrong turning” and we soon start to realise it. Each time we take a wrong turning we have three choices:
- turn back and try again (just lost a little fuel and time, that’s all)
- give up and go home (just lost a little fuel and time, and the chance to ever get to “the place”)
or thirdly:
3) Having already lost some fuel and time, we decide not to write it off and press on in the same direction on the hope that it will eventually get to “the place” even though there is no longer any basis for that assumption at all.
OK so sometimes option 3 just might actually get there, but more often and more likely we end up running out of fuel in the middle of nowhere. Was it the car’s fault? Was it the road’s fault? Was it the fuel’s fault?
So maybe option 2 was the best choice? Cut your losses and quit? Go home? Well, yes, obviously it is - unless “that place” is really worth the effort of finding your way through the maze.
But we knew even before we started that we would take some “wrong turnings”. It was the only way of finding the true route to our goal.
So the strategy changes. Instead of trying to eliminate “wrong turnings” and getting to “the place” with what a golfer would call a “hole in one”, we plan how to conserve our fuel and consume as little as possible on the “wrong turnings” in order to make it to “the place” where we want to be.
Naturally, in some cases, some start with so little fuel that it was never going to get them there anyway because of the inevitable “wrong turnings”.
Trading is not 100%, we all know that. So we also know that losses are real, present and inevitable. So we shouldn’t be fighting them, we just need to control them.
And when you know you control them, then you are no longer emotional about them. You accept that trading is about big steps forwards with some small step backwards. Just like life.