The upside of the downside
Gary Stone |
25 July 2014
One of the realities of trading and investing in the share market is that we WILL suffer losses. Not every trade we place will make a profit, and many will actually be losers. It is this fact that we have to come to grips with and be able to fully acknowledge and understand to be successful in this business.
Every trading strategy or system, regardless of its rationale or method for engaging the market, will incur losing trades. The number of losing trades will be expressed as a percentage or a win:loss ratio. Some strategies may have a high percentage of winning trades (and thus fewer losing trades), but the winning trades may only be relatively small in dollar terms. Other strategies may have a higher number of losing trades, but the winning trades will be relatively large in dollar terms.
It is learning how to deal with the losing trades, and more importantly still, strings of losing trades (often referred to as a drawdown) that is critical to long term success in the share market. How we handle individual losses and drawdowns will also provide us with some critical insights into our own personalities, trading mindset and skill level.
Learning how to lose becomes an integral part of our trading and investing persona. It is obviously much easier to deal with losses when we are trading a strategy that has demonstrated long term performance, and can provide us with the details of ‘typical’ losses, and ‘typical’ drawdown’s based on historically tested and live trading results. This allows us to be prepared for the losses when they come.
The old saying “when you lose, don’t lose the lesson” is an important part of our self analysis and self understanding. The pain of losing can be dealt with by either sweeping it under the carpet and trying to ignore it, or embracing it as a valuable learning tool. If we are prepared to see losing in this way, it makes us more likely to be winners in the long run. If we are going to lose, and we can openly accept that we will, we can turn the loss into a valuable gain by learning something from it, whatever it may be. It may be about position sizing, it may be about discipline, it may be about entry or exit rules, or a myriad of other things. The important thing is that a loss is only a total loss if we don’t learn something from it!
The way we deal with winning and losing has a profound impact on us at many levels. It is easy to stay where a loss leaves us so that we become stuck in the negatives where everything seems bad and as though nothing works.
But, we don’t have to get stuck: we can choose to change. We can make the choice to learn and grow from our losses and turn every losing situation into a valuable learning experience. It is when we don’t seize the learning opportunity that losing hurts the most.
But, learning is at its hardest during these periods because we have to do things that, to most of us, are not natural. It is not easy to be positive and upbeat when we are losing. It is difficult to control our emotions when we feel beaten. It is hard to get back up and keep going when we are being continually knocked back down again. It takes discipline to keep on applying the rules of our trading plan when we are in a string of losing trades or drawdown. We can, in fact, learn more from our losing trades and experiences than from our winning ones, but we have to be prepared to seek out the lesson and turn it into a valuable learning tool.
The choices to achieve success
Having made the initial choice to begin investing money in the share market, traders and investors are then faced with a huge number of choices as to how they will engage the markets and begin their investing and trading journey. Many of these are choices on a range of issues that they have not even considered or thought about until they enter the financial markets. Perhaps the most critical of these choices concerns the tools and education they will use in order to achieve their desired outcomes.
Many are attracted to the markets by the promises of instant riches with little or no work, and are dazzled into believing they will become an overnight success without any prior experience or knowledge of the markets; some set out on their own journey with blind faith in their own ability and the mistaken belief that they can single-handedly take on the markets and win; some poor misguided individuals believe that a buy and hold investment strategy will be the ticket to long term success.
When first starting out, the vast majority of people do not understand what they really need in order to be successful in their trading and investing activities. They are often overwhelmed by the range and variety of products and services available to ‘help’ them become successful traders and investors – newsletters, courses, technical analysis, fundamental analysis, indicators, systems, computer programmes, software – the list goes on and on.
Then of course there is the huge amount of information available on the Internet – investor forums, trading websites, on-line newsletters, the next wiz-bang trading system, ‘free’ data, and on and on it goes. In all of this, sorting the wheat from the chaff can be a mind boggling, time consuming and often daunting process that can leave you even more confused than when you started! It is a time sapping process that distracts you from what you set out to do and one that can take years of your time, and 100′s of lost opportunities to make a profit, as you fumble around trying to isolate what works and what is just plain rubbish.
The choices to achieve success in the markets go way beyond the use of technical or fundamental analysis to decide which shares to buy and the choice of which computer programme and which trading platform to use. Of far greater importance are the concepts of trade exit, handling losing trades, money management skills and techniques, position sizing models, risk management, and the never ending process of developing and maintaining the mindset and psychological skills needed to consistently and constantly successfully engage the financial markets.
There is far more to trading and investing than ‘just making money’ – whilst this may be one of our desired outcomes, it can only be achieved WHEN we get the processes right that allow us to achieve objectivity and consistency. This will not be arrived at by logging onto a chat forum to arrive at your buy and sell decisions, reacting to the nightly news or financial review, nor will it be achieved by listening to our friend’s biases or broker reports.
To move forward in this game we need tools and rules that have been tried and tested in the battled arena of the market. Then we require a process to be able to react to our tools and rules. This is how we make money in the markets over the long term.
So before you make your next trade, think of how you’re arriving at your trading and investment decisions. If you’re lost with information overload and inconsistency, we can get you on the right path. We’ve spent over > 10 person years in researching and re-researching the market and stocks to determine and re-confirm that our timing rules, risk management rules and money management rules remain relevant and continue to deliver a significant edge in the market. We then have the research to prove that if an investor follows the rules of SPA3, over a large sample of trades and trading events that they will out-perform the market. Big statement but this is exactly what our research demonstrates!
Gary Stone is CEO of Sharewealth systems. The views expressed are his and should not be taken to be those of Personalsuperinvestor.com.au.
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