No one likes to be in a state of emotional pain, so we typically avoid acknowledging what we have learned to define as a mistake for as long as possible.
- Which way is the market going tomorrow?
- What’s the best indicator?
- What’s the best strategy?
- How can I never lose again?
While those might be good things for you to focus on some of the time, they’re not the big picture. So if those things aren’t the big trading picture, what is? This:
Is your equity curve going up or down?
Right? That’s what we want to do in the market – make money. We want to start out with a certain amount of equity – and we want that equity to INCREASE. We won’t be right on all of our trades and so we need to know which trades are working and which aren’t.
If trades aren’t working we need to cut them as fast as possible. If trades are working we need to let them work so they can accumulate capital for our accounts. Over time, if you are managing your positions sizes correctly, and know your method’s win/loss and ratio stats, cutting your losers short and letting your winners run will increase your equity curve.
So why do a lot of equity accounts go the wrong way? Well, I’m not sure – but I can take a guess.
Maybe. Some traders say emotions blow up their trading accounts. It’s an interesting theory. Traders get caught up in the greed or fear cycle and they don’t behave as they should. But last year I did an exercise . I set up a simulated trading competition on a message board I post on. The competition didn’t use real money. Just stock picks.
At the end of the competition (that lasted 1 year through a variety of market environments), only 7 out of 30 members had a positive balance. There was no money on the line. And supposedly, no emotions. This leads me to believe that the problem could be one of two things:
Ego or method.
Ego because traders don’t like to be wrong.
We will let a losing position slide and slide until the pain of being wrong is eclipsed by the agony of losing money. For some people this can take a very long time.
Method because most traders don’t have a clear cut method.
Or, if they do, they simply don’t follow it. Why? Because it can get boring doing the same thing over and over and over again. But – once you lose enough money you figure out that boring is better than equity loss and you start following your rules.
If and when you notice that you’re not focused on your objective or on the incremental steps to accomplish your objective, choose to redirect your thoughts, words or actions in a way that is consistent with what you are trying to accomplish.
If you don’t have a method of your own, use the simple one I mentioned above:
Cut your losers short and let your winners run.
A lot of traders do the opposite. And they should probably stop doing that. But it’s hard. It’s like eating less junk/carbs/wheat/sugar and exercising more to lose weight. That’s really all you need to do. But yet we’re bombarded with thousands of books on the topic because people think their should be an easier way.
So don’t forget: above all else, you want an equity curve that goes up. Sure you will have drawdowns – that’s a natural part of trading. But in the long run – you want your equity going up. And by focusing on the big picture (the direction of your equity curve) you have a real shot of making that happen.
Until next time — good luck out there!