I don’t mean by the markets, but by yourself. Regardless of your system, you will have losing trades. Some of the best traders have a win ratio of only about 50%, so their predictive system is not much better than a coin toss. However they have great risk management in place and they know when to back off. Everybody experiences a series of bad trades, but only the best know when it’s time for them to stop to minimize the damage that would have been incurred otherwise.
If I could count how many times I was stopped out and how many times I experienced one of those series… numerous. But what prevented me from going bust was exactly that, knowing when to stop.
It’s easy to get caught in your own belief system into believing what the market has to do. Especially after a good run. But what can get to you even more is when you start seeing people posting their great results on social media, yours obviously can’t compare, and you convince yourself that now, right now, the market has to do exactly what you convinced yourself it will do. Man, not knowingly, this usually is the time when you’re preparing the field to be thrown under the bus. And then run over. And again. And again. Until you puke and give up.
To how many of you has this happened before? I was no exception, but I was fortunate enough that when I was starting out I worked as an analyst supporting traders, and I had an opportunity to watch them going through the above. Yes, professionals, too, if not brutally disciplined and honest especially to themselves, are not exempt of this. So before starting to trade with my own money I knew what I needed to minimize. Needless to say, most go through a similar experience, I did too and if feels like shit, right?
Thankfully lessons that I learned when observing and analyzing my fellow traders were very powerful and I realized early risk management trumps any kind of predictive system you might come up with when it comes to trading success and longevity.
This is exactly the reason that you have to pull those stop orders when they get hit, even though you might think it will be all good if you just stick it out a bit. In my experience it’s cheaper to get back in, even if it’s at a slightly higher price, than trying to play it tough. More often than not, you’ll be the one puking at the bottom and marking it.