How many times have we heard this one: “He/she/they caused me to blow up
my account”?
Blaming someone else for your losses. Pretty much every novice trader in
the world goes through this phase, and many experienced traders as well.
Now I’m going to let you in on a secret that will save you thousands or
even millions if you will listen and heed this warning.
Everyone loses from time to time. It’s an inevitable fact. No one, and I
mean no one will ever win 100% of the time.
Here’s another secret that many traders overlook. Winning percentage has
absolutely no bearing on whether one makes money or loses money over time.
You can win on 90% of your trades and still lose money over time. Sounds
impossible right? Let me give you an example.
The Bollinger band crash trade produces a winning trade about 86-92% of
the time. You simply buy when price closes below the lower Bollinger band,
then sell on any positive close, or after 15 days, which ever comes first.
Almost 90% of the time you will record a win with this simple system.
However…
10% of the time it will produce a loss. And the problem comes in that most
of the wins tend to be small gains. But when the system fails it produces a
big loser. Over time the few losers end up costing you more than the many
small winning trades produce. So in the end the system has a negative
expectancy despite having a very high win percentage.
Day trading for most people produces the same results. A whole bunch of
little winners that gets offset by one or two big losers. Then of course your
broker ends up getting rich off of your gambling habit.
As you’ve probably noticed newsletter writers always brag about their
winning percentage. It’s how you sell subscriptions. Amateur traders always
associate a high winning percentage with making money. In fact nothing could
be further from the truth as I’ve just shown. And then of course most
newsletter writers will never run a real time portfolio, and most will also
cover all the bases by providing one with many alternate scenarios. Elliot
wave newsletters are notorious for this tactic, but lets face it, almost
every financial newsletter uses this strategy. Of course with many alternate
scenarios one of them has to pan out, and that’s the one that is conveniently
used to pad their record.
And here’s the most dangerous mistake many traders make.
At some point every guru gets on a hot streak. That attracts subscribers
like a moth to a flame. And unfortunately many novice traders assume that the
guru has a crystal ball. So what do they do? They become overconfident in his
calls and they go all in.
Then sooner or later the guru misses a trade. Remember everyone loses from
time to time. If you are all in when your guru has a loss you end up blowing
up your portfolio. It doesn’t matter how much money you’ve made following him
up to that point. If you are all in when the inevitable loss occurs it’s game
over, lights out.
That’s when we hear the cries of he/she/they cost me everything.
The quicker you take this to heart, the better your chances are of making
long term gains.
NEVER BET THY WHOLE WAD!
ACCEPT THAT THERE WILL BE LOSSES!
PLAN FOR HOW YOU WILL COME BACK FROM A LOSS.
YOU CAN’T COME BACK FROM A LOSS IF YOU DON’T HAVE ANY MONEY LEFT.
So no matter how big your gurus winning steak is you need to keep in mind
that just means he’s closer to the next loser. Plan accordingly. Don’t bet so
heavily that you can’t recover when that losing trade hits.
