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Achieving profitable returns over time

As a believer in the philosophy that ‘timing the market’ is more important than time in the market (although both are necessary), we must endeavour to learn a number of new trading specific paradigms and prevent some of our old societal paradigms from impacting our trading.

I’ve written about some of these paradigms in previous Journal postings but today I’d like to focus on those who feel they needn’t lose to be able to win. Only by losing can we accept the fact that in order to achieve profitable gains over time, not all our trades will be winners. Less than half our trades may in fact be winners, but over time our trading system or methodology can be very, very profitable. It is this ability to accept the losing trades, to not fear losing and to stick to a trading system with an edge that will result in out-performance in the long run. It is this thinking and acceptance of losing that will make you a winner.

The importance of individual trades must lose relevance in the context of the overall performance of the system over time. This is a massive paradigm shift for most that enter the trading world. In the initial phases of trading careers most tend to focus solely on the outcome of each trade. Through attachment they ride the emotional roller-coaster associated with outcome thinking until they either:

1. learn to accept losing by shifting their focus to the long term performance of their system by understanding probabilities and hence what an edge is, or

2. give up altogether through frustration or lack of funds left in their trading account.

Accepting losing trades is difficult for those conditioned in life to be ‘winners’ and who mistakenly attempt to eliminate losing trades. There is not a trader or trading system on the planet that is right 100% of the time. There are very few that are right in excess of 80% of the time. Most traders know and accept this at the logical conscious level but because they have not ingrained it at the subconscious level they will be prone to trading errors, as if they don’t accept losing at the conscious level. Your subconscious always does your bidding for you.

The majority of systems fall into the 35 – 55% range of winning trades. Such traders and systems are profitable though because they know when to cut the losing trades and how to let the winning trades run. They are also acutely aware of position sizing and money management techniques that allow them to minimise their losses from the losing trades and maximise their returns from the winning trades. They are not looking for the ‘holy grail’ or perfection – merely to achieve the probabilities of their researched system over time – their edge.

Through the use of such a probabilistic edge, these traders are able to all but eliminate the fear and greed emotions which, if left unchecked, can begin to control the unprepared trader. This can cause them to begin second guessing the system, not enter valid trades, execute invalid trades, ignore stops and take too small or too large position sizes as they begin to attempt to gamble their way out of the mess they have created – all trading errors manifested through poor trading psychology.

This is a sure fire way to being beaten up both financially and psychologically by the markets. Those using a proven mechanical strategy and who have acquired the necessary psychological make up are at the complete opposite end of the spectrum – calmly executing entry and exit signals based on the rules and focusing on the total returns of the system rather than on the outcome of each individual trade. They are not swayed by greed and fear and are emotionally removed from the outcome of each trade. They have removed their ego from the trading process and place no value on the outcome of each trade – only that it is one of many in a long term approach to profitability. Winning and losing are states of mind. Which one do you have?

One Comment

  • Trevor says:

    I ditched my retail fund several years ago. I was not impressed to see money disappear as the fund performed badly. The final straw was the fee structure which was taking money out from the total amount, while it was also going backwards at a rapid rate. Financial advisers were also taking commissions, while not providing the service or results. I am now with an industry fund and do my own investing. While the last several months have been a bit trying, the money is now in the black again. I would not touch many of the retail funds due to their fee structures while not performing. The industry fund fee structure is extremely low, unlike a lot of current retail funds

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