Process Over Profits
One of the hardest things to realise about trading is that if you want to make money at it then you have to forget about profits. Trading is not predictable, its probabilistic and in any probabilistic endeavor it is how you play the game, not whether you win or lose that will ultimately determine your long term success.
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This of course flies in the face of our win-at-any-cost culture and I think explains why most traders never find success in the markets. Take two regular traders at a cocktail party. One guy says, “I haven’t had a losing trade in six months!” ( I can’t tell you how many people like that I’ve actually met) . The crowd instantly oohs and aahhs and everyone surrounds the man with the “golden touch” seeking his advice and asking him to manage their money.
Most people don’t realize it yet, but they are about to make the single biggest financial mistake of their lives. That’s because in markets as in nature the force of reversion to the mean is about to assert itself in a very ugly way. The guy with no losing trades, is also a guy who never uses stop orders and most likely averages down on his trades. Up to that instant his “process” has been working -- but as we all know if he continues to do what he does he will inevitably lose all of his money as the market turns into a one way wrecking machine.
Another guy at the party, when asked about his trading is a lot more humble. He admits that he has been losing money as the current market is not amenable to his style of trade, but he notes that he has been very rigorous about risk control and his losses have been contained to a manageable level.
Now when given the choice between two traders the overwhelming majority of people will give their money to trader #1 when in reality they stand a much better chance of winning with trader #2. That’s because as human beings that have had to rely on quick judgement in order survive on the plains of Africa we have developed a series of decision shortcuts that may have helped us to survive and evolve but now act as a massive handicap in our ability to accurately assess risk and success.
In short we are governed almost instinctually by our first impressions and tend to overweigh most recent success rather than long term strategy. That’s why most traders and investors like to chase the “next big thing” and that’s why they all inevitably fail. Few traders realize that winning in the markets is largely a matter of luck, but losing is mostly a matter of skill. That’s why traders that focus on limiting their losses, diversifying their trades across a variety of currency pairs and refining their entry and exit techniques -- in short traders that focus on process not profits -- will have the greatest chance to succeed in the game.