Stock Ideas 
Investing Ideas Why Losing Might be the Best Thing to Every Happen to You
Investing Ideas Why Losing Might be the Best Thing to Every Happen to You 
Market Watch
|
Gazprom vs. Exxon Mobil Gazprom is the world’s largest natural gas company. It holds 17% of the world’s total, and 60% of Russia’s. It also controls the trunk lines throughout Russia as well as most production, transmission, processing and marketing. |
|
| More... |
Most Popular
Login Form
| Why Losing Might be the Best Thing to Every Happen to You |
| Tuesday, 09 October 2007 | |||||||||
|
Dear Reader, Regardless of whether you’re a new or experienced trader, sooner or later you will encounter the inevitable losing streak. Losing is as much a part of trading as is winning. Nonetheless, nobody likes to lose. A string of losses can feel a bit like digging your own grave. In fact, more than a few traders have gone bust just because they didn't know how to handle their losses. The secret to successful trading is knowing how to handle losing streaks. So today, I’ll show you three ways to recover from a series of losses and return to profitability again. 1. Winning the Mind GameNobel Prize-winning psychologists Daniel Kahneman and the late Amos Tversky have shown that people tend to experience the pain of losing more keenly than they do the pleasure of winning. As a result, they tend to hold on to their stock market losses far too long. It’s easier to deny the reality of a loss than doing the smart thing: getting out of your position.By contrast, winning traders are honest with themselves about their losses. They know that losing is nothing to be ashamed about, so long as they follow a disciplined trading plan. Further, smart traders don't take losing personally. Instead, they see it as a learning experience. Don't endow a losing streak with more significance than it deserves. Balance its importance against your winning streaks. Successful traders do more than recognize the inevitability of losing streaks. They are alert to the first signs of a drawdown. Because they keep careful records of their trades, they are quick to see the beginnings of turbulent trading periods. (One useful record is tracking the average number of consecutive losing trades your system generates. If your losing streak exceeds that average, that's an indication you may be sailing into some rough seas.) 2. Manage the Risk, Manage the Loss … and Win BigPosition sizing - how much to buy - is the cornerstone of successful risk control. When you encounter a losing streak, try cutting back on your position sizes. In other words, trade smaller.For example, suppose you started with a portfolio of $110, 000. And suppose you normally risk one percent of your total portfolio equity on any one position. But with a recent losing streak, your total portfolio equity has sharply declined to $100,000 in the past month or so. You've lost 10 percent of your equity. So instead of continuing to risk one percent on each trade, why not cut back and risk only half a percent of your total equity per trade? You'll only be able to buy half as many shares when you place a trade. But you'll drastically reduce the amount of money you're losing while you work your way through your losing streak. When you start to get a series of winning trades and your trading equity rebuilds itself, you can return to risking one percent of your equity. "Whenever you get hit, you are upset emotionally. Most traders try to make it back immediately; they try to play bigger. Whenever you try to get all your losses back at once, you are most often doomed to fail," says champion trader Marty Schwartz, author of the book Pit Bull (I recommend it to anybody serious about trading stocks). "After a devastating loss, I always play very small and try to get black ink, black ink. It's not how much money I make, but just getting my rhythm and confidence back." 3. Trading System Reality CheckupLook at a losing streak as an opportunity to evaluate your system and make it better. Backtesting your trades is one of the most important things you can do to improve your trading system. When you backtest, you evaluate your trading system by seeing how it has performed in relation to all of your real or paper trades. Backtesting will tell you:
* What type of gains you can reasonably expect * How much you can risk and still stay in the game * How many consecutive winners and losers your system will typically produce * What kind of win/loss ratio is normal for your system * Your average drawdown. Be aware, however, that backtesting has its limitations. What may have worked well in the past will not necessarily work well in the future. That said, you can be assured that what has not worked well in the past will almost certainly fail in the future. Learn to treat losses like a professional trader. Look at them as an opportunity to improve each aspect of your trading so that when the next winning streak comes your way, you'll be able to take advantage of it even better than before your losing streak. Good Global Investing, AMG P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
|
|||||||||
Reviews (1)
| < Prev | Next > |
|---|