If you look at any of the social media sites that are dedicated to trading or watch the pundits on business television, you are likely to think there are a lot of market players who never make a bad trade or investment.
The number of people that claim to own a stock after it moves makes it look like it must have been a painfully obvious investment. Of course, if anyone even admits owning a stock that is down, it was only a “small” position and no big deal.
Twitter is probably one of the worst platforms for creating false impressions of trading success. If half of the claims that are made there are true, you have to wonder why more folks aren’t sailing in the Mediterranean on their 100-foot yachts.
This bragging and claims of perfection are not new. Market “experts” with something to sell have to cultivate an image of infallibility, and many market players have fragile egos and develop a psychologic need to talk about their successes.
The problem with these claims of perfection is that they can cause traders and investors to try too hard to avoid mistakes. The impression is that every trade has to be a big winner.
No one ever talks about making dozens of mistakes in their quest to find a good trade, but that is what works. You can produce exceptional profits with a very low batting average. Just one big winner can easily offset a dozen losers, but it all comes down to the right trading methodology.
If you don’t have losses on a regular basis, you are probably trying too hard to be perfect. When you try too hard to be perfect, you will miss out on many great trades.
A good recent example of this is the frenzy in the cryptocurrencies and blockchain names. You can’t avoid the stories of people that have made huge amounts of money in these stocks, but you also can’t avoid the warnings from “experts” that will tell you that this will end very badly and will produce massive losses for many people. That probably will happen, but does that mean you shouldn’t trade this wild market?
If you are willing to make a mistake and have implemented a plan to mitigate your losses, should you be wrong, then there is good reason to try, if you have confidence in your trading methodology. If you are afraid you might make a bad call, you will never touch this sector and will miss out on the potential.
You likely will make a losing trade in the cryptocurrency/blockchain names, but if you accept that fast, then you change your entire mindset when it comes to trading the group. Yes, I will have some loser, but the volatility will create opportunity. If you are confident you can manage the trade, why worry about a loss?
While you always want to approach a trade with the best possible risk management, we can’t let the potential for losses keep us on the sidelines. When you embrace losses and view them as a normal product of your trading, you will find that you will have better luck. If you are fearful of not being perfect, you are likely to forego the trades that carry high risk as well as high reward.
Jesse Livermore, who is regarded by many folks as one of the best traders ever, employed an approach he called “probing buys”. The idea was to take a position in a stock that looked interesting, and then decide whether to pursue it more aggressively or not.
The key here is to put some money on the line and not worry if it is a loser. You wait for the perfect situation, you might never even begin to trade some stocks. Making a probing buy changes the dynamic. It may still turn out to be a loser, but you will view the situation differently once you are actually involved.
If you don’t have a regular diet of small losses, you are probably too conservative in your trading or not disciplined enough. It is very easy to fall into the trap of holding on to a loser because you don’t want to book the loss and admit it was a mistake. You have to be very disciplined and systematic in taking losses.
Quite often, taking the loss will be a mistake as well, but the important thing is to embraces losses as part of your trading routine, and you will find that you have greater potential for big profits. As the old saying goes “you can’t win, if you don’t play”.