Expecting to lose – the sleep test

Nobody likes to lose – I can safely say. It’s been hardwired in us as part of the survival instinct, that we need to win.

Financial trading is a very different ‘game’. You have to expect to lose, in order to win. This is not to say that we have to like losing. Instead we need to get close to the idea that losing is not actually losing. Now that may seem quite crazy. But it’s not. In any war several battles are expected to be lost. A nation or group expects to sustain losses in order to win the war. This is the similar picture in financial trading i.e. take your losses but make the aggregate of those smaller than the aggregate of your big wins. It’s simple but not easy.

On entering a trade a trader must know what he expects to lose. He must be able to go to sleep comfortably on that loss.  The expected loss is defined by the stop-loss level taken. That is his wager that the market will go in the opposite direction to the stop-loss. Look, it’s no point going to a casino and holding your chips in hand because you’re afraid to lose them at the table. That would surely be silly. Casinos are about games of chance and rolls of dice etc.Financial trading isn’t about rolling dice. Well not for the disciplined trader at any rate.

Sound financial trading is about making structured evidence-based risk assessments and following tested strategies. The disciplined financial trader is not predicting where price will go. He knows he has no control over price. He knows that the only thing he has control over is how much he can lose. He expects to lose an individual trade or a string of trades. He doesn’t expect to win every trade or to lose every trade. He knows his expectancy based on a sound track record.  He may have probability estimates but that’s not an expectation built on hope,  as in the usual context of everyday life.

The gambler on the other hand is hoping dearly for a win, even though he expects to lose and can control his loss. Whether he does is a different matter. The disciplined trader hopes for nothing!! He is has control over limiting loss. He is a robot of sorts, dispassionately playing tested methods and strategies to manage chaos. He has confidence in those from his own experience and knowledge.

The disciplined trader respects the power of the markets, but he does not fear it. He knows how to protect himself from a very savage beast! But mostly he understands the hard-wiring of human nature within him. He knows his list of enemies within and how to control them.

Trade carefully – sleep well.

The information provided herein is opinion only. Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of investment. You are responsible for your own due diligence. To summarise, we do not provide investment advice, nor do we make any claims or promises that any information here will lead to a profit, loss, or any other result. All materials are for educational purposes only. We are clear in our SYP.





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