Experienced traders say that you have to embrace losing money. That may seem to be the exact opposite of an activity that is about making money. The point is that taking a loss is how you recognize that your trade was wrong, and the earlier you do that the better you will be in terms of preserving your capital and your sanity.
Today, I took a loss that I truly embraced. The financial markets were in a state of real turmoil after the devastating earthquake and tsunami that hit Japan. I had seen reports of the news when I woke early to trade in the London session, which starts at 2am. (I don’t make a habit of doing that, but I am experimenting as market conditions are quite different from the New York session, which starts at 7am.)
As currency markets took account of the dramatic events and flows started to go in a particular direction, things moved fast and far. That can be good if you are there and in the right direction, but not so if you are going against the tide. I had a trade working and it seemed to be doing nicely. I left it and the market to go back to bed at about 4am. When I woke again just before 7am, things still looked good and I booked my profit. I headed off with my family for the usual drop-offs, feeling good about the day’s trading.
When I returned, I tried to assess what was going on in the US markets, and I had a bias for a trade and played it, and it worked well. I booked gains again. I then watched developments as US data came through. Nothing seemed to really have the effect of changing sentiment. I thought about another trade and set it up, but it seemed to be against the tide, which had indeed turned once the New Yorkers got underway. Fortunately, I did not get involved till later in the move. But, when I realised that I was probably going to suffer, I decided to let the stop-loss get hit, if it were or stay untouched if that were the market’s course. It got hit. It took away much of what I had booked for the day. I was not alone, as a stream of commentary showed as the move had been further in a few hours than seemed reasonable. But, let’s not try to reason with the results of mass human behaviour. But, why did I embrace the loss?
My friend, about whom I wrote yesterday, benefited from the market’s about turn, and his potential nasty loss ended up being a profit. I had sent him a message earlier in the day that I would take the opposite position to his as that was a guarantee that the trade would move in his favour. I was joking, but subliminally the notion must have been there as I placed my losing trade. When he eventually replied to the message and told me the outcome, he was really grateful that the money I had put into the market landed in his pocket.
What was a sort of sacrifice by me–and I use that term very loosely–was worth it. It did not spoil my day or my week–I ended up slightly ahead on the day and nicely ahead for the week. I have given myself the equivalent of 40 daily targets for Lent and I have to make the steps correctly–not least because markets are not open all of those days so I have to overperform on trading days. Did I want a challenge? Walking the wilderness of currency markets will give it.
My friend and I are having a sort of trading Epiphany and it is helpful that part of that is being open about trades that work and trades that do not. We are being each other’s keeper. Losing is very much part of the game, but it has to be put into its proper context. Similarly, winning is not the expected norm so beware when winning streaks get long. Talking through what you see in price movements and how you plan to manage what you are doing with a trade is one of the benefits of interacting with others. In the world of retail trading it is harder because you tend to be working alone and somewhat focused on what you are doing. But, preview and review are important, whether you are making losing or winning trades.
Make no bones about it, doing well at trading is extremely hard work. Simplifying what you do is one of the keys to success that I am learning. That is not to decry others who have complicated styles and set ups. We all see the same prices yet we do not all come to the same conclusions about where things are headed. The reality of the hard work for a retail trader like myself was made clear this afternoon. A very experienced and well-respected institutional trader sent a message on Twitter that he had just lost all of his week’s gains with today’s movements. That admission will perhaps land him another set of hate mail about the trade suggestions he puts forward. But, he was willing to sacrifice himself in the belief that he had read things right. The market told him otherwise.
Trading makes you humble. You need to find a way of being on an even keel. Winning days do not last forever, and nor should losing ones. In fact, many comment that the winning starts to come more easily after learning to lose.
As Lent continues, I hope that I will take my 40 steps as I wish–smoothly and steadily, as if I were walking the Labyrinth. (Another part of the daily Lenten target is that when it has been made my real-money trading platform should be closed. It’s useful to keep track of what is going on, so I can keep my practice/play money account open.)
I made one sacrifice today and know that it did not involve that much pain, and even left me and my friend with a little gain.