I like that idea. Prepare your self for taking more losing trades than necessary. Then if it doesnât happen you will have been rewarded.
There can be another view about losses. When you enter a trade you have to be prepared that it can go against you and you will exit. Hence the cost of your decision to enter is not 0 and it is not 1 tick. The cost is your stop loss plus broker fees, data fess etc.... If the trade goes against you and you exit at the stop loss, AND the continuation of the day shows that my entry was wrong than I will not consider this as a losing trade. Also it will not be a losing trade if I can re-enter at a better price. With that said, if I have 5 trades where the action proved my exits wrong I will be concerned.
Interesting thread. Averaging up could help here as you have the benefit of holding a larger position when a winner comes along.
All of these concepts are dandy on paper but you forget that the biggest obstacle you run into after getting seriously banged up time after time is not the loss of money but the loss of confidence. Amateurs are so caught up in P&L, they can't think straight. But you need to understand that confidence is everything in this game and once you lose that you're as good as being dead.
Jake Bernsein says we should be able to handle 6 consecutive losses: http://www.optimusfutures.com/tradeblog/archives/understanding-trading-systems/ âEven the best trading systems can have 6 losses:. This is the one point that continues to frustrate and confuse traders. They want instant results and often lose their patience after a series of losses. I have found that most traders are ready to give up after only 3 consecutive losses. Given that even the best systems will show six or more consecutive losses the odds are that most traders give up too soon. But why?â How many of you can handle 6 consecutive losers?
Given enough time even the highly improbable becomes likely, if you can't handle 3 losses, your in the wrong biz
With proper money management, you can have a string of small losses and still manage to come out ahead. But when do you finally throw in the towel and admit there's something really wrong with your system? Another point is what happens should you lose for the 7th time? Like I said above, it's not so much about the loss of money but the erosion of confidence that will greatly impact your trading. There will always be another day to trade. Such is not the case if you lose confidence in your trading ability. As such, it's paramount that a trader preserve not just his trading capital but his sanity.
Shagi, both your posts mirror what is covered Mark Douglas' excellent books "The Disciplined Trader" and "Trading in the Zone". Basically, if you have any kind of edge at all and you take ALL your setups, you will be a net winner over time. He makes the point that the reason a casino always wins is because the casino doesn't get to pick and choose which games it will participate in; it has to play with everyone who wants to play. The winning comes from its edge. If in a day you take ten .10 cent/share losses and catch the 2.00/share move, you're a big winner. Combine strong risk management with aggressively taking every setup reflected by your edge and it's very difficult to lose. I have a terrible time staying focused and trading all my signals.