Like most investors, I used to be very adverse to losing. It was after I was introduced to trading, I discovered there isn’t a holy grail that will give 100% winning accuracy in every trade. In fact, accuracy is not crucial to the success of a trading system.
I believe many investors (especially the fundamentalists) are not very clear about what trading or technical analysis is really about. They follow dearly to Warren Buffett’s rule: “Rule No 1: Never lose money. Rule No 2: Never forget Rule No 1.” If you are a buy-and-hold investor, then I agree with you that you cannot afford to lose your trade. Simply because that is your only trade!
However, a trader makes many trades in a year, in a month and even in a day! Hence, there are bound to be losing trades, but the maxim is how George Soros put it, “it’s not whether you’re right or wrong that is important, but how much money you made when you’re right and how much you lose when you’re wrong.” Trading is about probability, such that there are bound to be a percentage of winning trades and losing trades. However, the loss must be limited while the gain must be unlimited. In this way, the big wins are able to cover all the small losses and then more. I have always explained to many people interested in learning to trade that the thought of losing money is part and parcel of trading and this unnatural behaviour is not everyone’s cup of tea.
In addition, technical indicators alone are not adequate. The right combination of a FEW indicators is paramount in building a SYSTEM that have a POSITIVE EXPECTANCY over the long run. To really test out the combination that works takes tremendous effort and time. This is the reason why I joined T3B and use a system that has been proven so that I can immediately work on my psychology and trading.
I was Sneered at
I was recently trading in the Hong Kong Market, riding on the unexpected run after the crisis. My friends were so sure that it is a bear trap and the run will not last. I told them no one can predict the market and if I am wrong, I am ready to cut loss. They sneered at me and think I am like a crazy man willing to throw my money away. Immediately, I understand I cannot carry on with the argument if they do not understand what trading is all about. Humans are always influenced by emotions and often bring it to decision making in the market.
Sometimes it is indeed ironic. We should wait for the market to show some trend before we invest. But when the trend appears, many are afraid to get in. If one is afraid, then he shall not trade. I always believe investors are like entrepreneurs. We have to take calculated risks and once decided to do it, we have to be fearless and not let emotions and doubts get in the way. This is why trading requires strong psychology management. The difference in the level of psychology is enough to separate a successful trader from an unsuccessful one.