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Are You EMOTIONALLY Ready To Lose?


We all would like all our trades to be winners, but we know this is not possible. We know some of the trades will be losers (at least I know that, I hope you don't expect all your trades to be winners). Many traders think that if a trade has lost money, it was a bad trade. They try to identify what errors they made that lead to losses. Why? "Because I lost money! So surely I have made a mistake somewhere?”

Was it the right conclusion? Is any losing trade necessarily a bad trade?

 

The answer is no. No matter how well he executed his trade, there will be losing trades because we are playing a probability game. Trading is a business based on probability. And probability means that sometimes we get what we want, sometimes we don't. And that's the nature of the this business.  The sooner we emotionally prepare ourselves for a stock market loss, the better we can operate it as business.

 

"There's a difference between knowing the path... and walking the path." - Morpheus

 

How you react to your losses?

 

Most people know there will be losers. But to paraphrase Morpheus sentence, "there's a difference between knowing that there will be losers... and actually experiencing them". In a probability game, it is guaranteed that we will eventually experience a string of losses. This can be in the form of losing days and at times, losing months! But even knowing that losses are part of the game, most traders still react the wrong way when those losses actually happen. How you react to your losses is what separates good traders from bad.

 

It gets tough when we experience extended periods of losses or poor performances and that's where most traders quit because in the first place they never accepted emotionally that they are playing a probability game. As soon as a few losing trades and/or a drawdown of any kind occurs they hit the eject button and continue in their search for the Holy Grail strategy that always wins. Jumping from one trading system to another will only lead to more frustration. Only when you will accept emotionally that you are playing a probability game, you will be able to take your trading to the next level.

 

Few members asked me today "What went wrong with the YUM trade?" The answer is: nothing went wrong. This was the sixth time we played this name before earnings. The previous five trades produced +18%, +11%, +17%, -4% and 12%. As you can see, this was a high probability trade, it just did not produce the desired result this cycle. But the loss was only 5%, and some members actually managed to squeeze a small gain.

 

At SteadyOptions, we are trading probabilities. This is why our winning ratio is well over 60%. Combined with the fact that our average winner is higher than our average loser, it gives us a positive long term expectancy. In Q1 2014, we produced a 69.2% ROI and continue to significantly outperform the markets. It doesn't mean we won't have losers. But as long as we execute our strategy, we will continue to deliver outstanding results.

 

Finally, I would like to quote Peter Brandt for whom I have a great respect:

 

"Too many traders have an obsession with Winning Trades.  I hate to be the bearer of bad news to some of you, but taking losses is the primary job description of a market speculator. If Losing Trades offend you or upset your emotional chemistry, if you consider “being wrong” to be a character fault or a “problem” with your trading approach, if you even think that the marketplace cares what you think or what you do, then market speculation is probably not for you.

 

I have known many extremely profitable career traders over the years and very few of them have a win rate in excess of 50%. Almost to a person, these traders view taking losses (many losses) as the process of finding winners.

 

To be a successful profit taker, a trader must first become good at taking losses. Sorry – both profits and losses are part of trading. If Losing Trades and being wrong bothers you then trading is not for you. If you become obsessed with Winning Trades and making money back in the same stock in which you lost capital, then you need to seriously examine if you should be involved in market speculation."

 

If you want to learn how to treat options trading as a business and put probabilities in your favor, I invite you to join us.

 

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