Wednesday, February 10, 2010

Weathering the Inevitable Storms in Trading

A little while ago, something very unusual happened to my trading: I had five losing trades in a row. That might not seem like a big deal, but from a purely statistical vantage point, it is. After all, if you average only 50% winning trades, the odds of five consecutive losers by chance is only a little more than 3%. If you average 60% winners, the odds come closer to 1%.

So, yeah, if you trade often enough, the string of losers will happen. But this wasn't chance, and I wasn't trading my usual.

I recognized this midway through the "slump" and cut my size. By the fifth loser, my account was down less than 2.5%. Within a week's time, I recouped almost all the money, milking two nice trades during a high volatility period.

There is absolutely nothing exciting about my trading. I'll look for one or two moves in a day where I see very good risk/reward. I don't trade every day; only when conditions are right and when I can be fully focused on what I'm doing. I'll size my trades so that five losers in a row won't lead me to get carried out--and won't throw me into a tizzy. If I make 1% on my cash per month, I'm a very happy camper.

I don't ever go all in, and I don't go for home runs. That keeps me on a very even keel, and it keeps me loving the game and continuously learning. It's amazing how much you can absorb when you're not worrying about P/L.

Here's an excellent New York Times story of a skier who approached his performance discipline very differently and what he's now doing about it. He approached life with an all-in mentality and it led to bitter losses. Now he's back competing, but in a very different mode.

At some point, you're going to lose...and lose again...and lose again. So much of success boils down to being able to not only survive those times, but learn from them.