As a discretionary trader, I have gone through many trading cycles – both good and bad.
When I’m totally in sync with the markets, nearly all my trading decisions are insightful… my timing is excellent… and the profits flow effortlessly. Somehow, I manage to execute the right trade at just the right moment.
Then, without warning, I can shift into a cycle during which practically every decision I take is a loser.
Try as I might, I can never figure out what causes the change. I do the same analysis and preparation. But during the negative cycles, I have a remarkable ability to snatch defeat from the jaws of victory.
I’ve come to recognize, however, that I’m never truly as good as I seem during my good cycles… and I’m never as bad as I seem during my bad cycles.
Fortunately, I have always found that the pain of losing overwhelms the sense of happiness I feel when I’m winning. I believe this is what has enabled me to survive for so long as a successful trader.
You see, the pain of losing keeps my ego in check. It helps me remember how fallible I am. Therefore, my trade recommendations almost always include a stop loss.
I’ve made lots of mistakes in my forecasting and trading. It’s just human nature. Over time, though, I have almost always managed to end up net profitable.
That’s because I understand something that’s crucial to trading successfully that many traders don’t…
Without using a rigorous risk management system and embracing the reality that losing trades are an important part of successful trading, a trader is doomed.
All traders – professional and retail – have to come to grips with the fact that being a winning trader means being wrong a lot. For me, it’s over 40% of the time.
When I’m in sync with the markets, I feel like no one could possibly trade better. And when I’m out of sync, I feel that no one could possibly trade worse.
To that extent, I have learned to take neither my winners nor my losers personally. I don’t allow bad trades to damage my sense of self-worth, or let winning trades inflate my ego.
Brutal self-honesty is essential to long-term success… and being able to take losses is part of that process. The traders who cannot do this are the ones who wind up quitting, due to frustration, after losing a large portion of their capital.
You see, during the bad cycles, I never know what’s changed or why my instincts are suddenly counter-productive. But I have learned to quickly identify when my timing and feel for the markets is off – and reduce my exposures accordingly.
I’ve managed this cyclical trading pattern since 1984, when I first started seriously speculating in the markets. Whether my trading was in foreign exchange, stocks, bonds, or commodities, it made no difference.
I could follow all the technical rules, do my fundamental research, and prepare myself as thoroughly and professionally as possible. I always adhered to strict money-management principles.
But making money when that quiet little voice was silent – the one that popped into my head when I was on a hot streak – was, for me, next to impossible.
The frustration of fighting so hard to keep my losses small when I was out of sync, however, made the joy of making money effortlessly all the more satisfying.
Regardless, whether I’m in or out of sync, I always aim to take sensible trades with the same level of analysis. I’ve learned that if I’m patient with myself – and the markets – I will eventually slide back in sync… and find ways to earn excellent, risk-adjusted returns.
Editor, Money Trends