Always Be Wrong
What is the single biggest reason for failure in trading?
Is it strategy?
Is it bad analysis?
Is it costs and execution?
No and no.
Those are all just excuses that every trader uses to justify their losses. I’ve modified my strategies a dozen times. I’ve mis-analyzed markets almost on a daily basis. My costs are often as much as 50% of my gross profits. And yet I have been consistently profitable this whole year and haven’t had a losing trade since Brexit.
Why? Because I always assume I am wrong.
When you go back and study all the great blow up trades in history from Nick Leeson to Long Term Capital to the Whale Trade of JP Morgan there is only one factor that unites them all.
They all thought they were right and they kept fighting the market until it broke them.
In fact I bet if you were to do your own “greatest hits” of blow up trades the dynamic that ties them altogether would be the same. You just couldn’t imagine an outcome opposite your expectations and as result you were margined called. I certainly was. I can’t even begin to count how many times I blew up my FX accounts when I first started trading. And in fact that behavior didn’t just go away. It took years of hitting my head against the wall, before I finally tried another way.
Now I look at the market differently. I only have two impulses whenever I put on a trade -- win right away, or get the f- out with minimal loss. As a result of this approach I often miss successful setups and even more often leave lots of pips on the table.
Any trading “guru” would shake his head in disgust at my three-yards-and-a-cloud-of-dust style of trading. And I am the first to admit that I leave too much pips on the table. But I also know that I wouldn’t change my approach for a million bucks because I know that all trading books and other fables set up a false dichotomy. “Sell your losers and let your winners” run they say. But in real life 9 out 10 of your winners will turn into losers if you hold them long enough, especially in a two way market like FX. So all you will end up doing is cutting losses, until such time when you will get tired and annoyed and will make the biggest mistake of all which is letting losses run uncapped.
That pretty much is the story of every blow up in FX. It starts with bad advice and then proceeds with bad behaviour and ends up with stubborn refusal to admit you are wrong.
How much easier would it be, if being wrong was your default assumption? If you stopped trying to make trades and just started to make probabilistic bets, keeping every loss to less than 2% of your capital?
In trading being wrong is being strong, but for most of us it takes years to realize that idea.