The goal of a trader is to make money. Right!?
When we learn things like technical analysis or create rules and systems we view the information through the lens of making a profit. As in, how do I use this information to make money. Our whole philosophy around trading, whether we acknowledge it consciously or not, is informed by this goal of making money.
But what if it is the entirely wrong lens to be using. As in, what if trying to make money is the wrong goal for us to target. What if this goal is the very reason why we will struggle.
I was reminded over the last few days that so many successful people make lots of mistakes before they finally achieve success. What eventually separates them from the unsuccessful, in many cases, is that they quickly acknowledge when things are going wrong and cut their losses.
Ambitious people like to push their limits and they fuck up a lot. But the smart ones limit the losses on their fuckups. By limiting the losses on their mistakes they set themselves up for asymmetric gains.
Fuck up 4 attempts with minimal loss and win on 1 with high return. Sounds good to me. Eventually, their experience teaches them how to avoid more of their mistakes and progressively skews the results in their favour
The key to success is knowing to cut losses as soon as you see things not working out.
It also requires less talent and skill in reading the market because it’s more about simple math.
So let’s shift our thinking for a moment and think about how we really become successful traders.
Being honest, I bet you have whipped out a calculator to see how much money you could make if you were to compound a 40% return on capital over 5 or 10 years. I think we all have done that.
But have you ever sat down and calculated a forecast on potential losses? probably not.
Instead, we spend a crazy amount of time and effort playing with indicators and squiggly lines in an effort to project opportunities for gains. We want to believe that we can use these things to project and predict profit.
We can’t predict a winning trade but we can know, with 98% certainty how much money we will lose on a trade if the trend goes against us. That’s what a stop loss is for.
You can’t use technical or fundamental analysis to predict a winner but you can take a series of trades with limited risk in the hopes that one will pay off.
You can know how to minimise your losses. And in a trending market that is your best bet. Assuming that the market is still in trend.
Whether we realise it or not, we take trades with the hope of a positive return. While it is just as likely that we will get stopped out, if not more likely. We don’t trade with the hope or vision of that happening. Can you see the unspoken bias that we are bringing to the table here. That is because our lens is focused on winning trades when it should be on minimising losses.
Switch your lens and look at all of your trading and TA with the goal of where you see risk of the trade going against you. Not what you could win but what you can acceptably lose. Usually 1% of capital.
Focus on using TA for this and not for predicting how much you might gain. Just forget about the wins. If you are in a trending market the bias is in your favour anyway. You just have to accept that will be enough for success.
Now I know that there are a lot of people that are going to claim that this is already the way they trade. But I doubt it, from what I see you writing on X. So before you make that claim, I just want you to sit with this idea for a while and explore the implications of what I am suggesting here.
Try it out and see what you learn from the exercise. It may take a few weeks to really shift your perspective but you have nothing to lose from doing the exercise.