If you are investing according to a consistent method then all trades are potentially “good” trades. Don’t fret about which one is the best of the “good” trades or which one will be a loss trade. Just do the trade according to the rules of the methodology! The rules are your edge in the market with loss trades built into the edge.
Successful active investment is about making profits, not about being right.
It doesn’t matter which trade delivers you a profit. Active investment using technical analysis is about finding high probability trends. This is why it must become easy to exit trades according to the rules whether they are in profit or in loss at the time. Don’t hold onto a trade because you want to make more profit or less loss in that particular trade. It doesn’t matter; the next trade may deliver more profit. Detach yourself from your prejudices about past profitable or loss trades. You do not know what will happen next nor do you need to know to be successful in the markets.
Follow your exit signals without any expectation of what might happen after you exit. Don’t hold on to sell at the original entry price when facing a small loss after an exit signal occurs. There is a very good chance that the entry price will not be achieved again for a long time, maybe years, if ever.
A good example is Telstra, a “Blue-chip” stock on the ASX which has remained in drawdown from its high of $9.20 for more than 11½ years as at November 2010. “Sound” companies with Australian household names such as Bab Cock & Brown, MFS, HIH Insurance, One-Tel, Bond and Quintex went into liquidation where their stock prices went to zero let alone regaining their old highs!! There are countless examples of such stocks around the world.
In the sub-prime bear market of 2007 / 2008 many “blue chip” stocks lost 50% – 90% of their value in a matter of a few months, some even in a few weeks. No, they don’t all come back! Nobody knows what is going to happen in the future.
Exit the trade
Ignoring exit signals merely puts you under undue psychological stress because you enter a zone where there is NO signal to bring you to action. You must have known that the price would go higher! The net result is that you take no action and hold onto a losing trade, hoping that one day you will get your money back and avoid the pain that comes with closing out a loss trade.
This mentality will cause large loss trades to occur, the ones that wipe out all your profits for the year, or longer. Always ensure that your active investment capital is in high probability trades. Note there is no such thing as a guaranteed profit trade, just a high probability one.
Take responsibility
Take responsibility for your actions and results. If you do not there will always be someone or something else, i.e. not you, causing you not to perform. This mindset allows you to continue repeating your mistakes………..because it is not you making the mistakes! This means that you will never need to address anything to improve your performance because it will always be beyond your control.
Learn to take responsibility for your actions so you can address any shortcomings and move on to grow and improve.
To complete this journal posting I will use a scenario used by Dr Van K. Tharp to illustrate a case in point on actively investing with a Trading Methodology. This material can be found in Jack D. Schwager’s book, “Market Wizards”. If you are trading with a methodology (entry and exit criteria, portfolio, risk and money management) then you can choose one of the following two ways of trading.
Thought pattern one:
- See the Trading Methodology signal.
- Recognise that it is a valid signal according to the rules.
- Tell yourself what might go wrong if you take the signal.
- Feel bad about it.
- Do not do the trade.
Or you could follow this second thought pattern:
- See the Trading Methodology signal.
- Recognise that it is a valid signal according to the rules.
- Feel good about it.
- Do the trade.
Or put another way: confidence is thinking about what you want to happen and lack of confidence is thinking about what you do not want to happen. Whilst your confidence will not affect the outcome of the opportunity, it will affect whether you partake in the opportunity or not.
If I could leave you with this statement,“The cost to you for your fear will be the loss of profits which will be far greater than the losses you fear”.
