I’ve had a lot of failures in my trading career. Of course, when I fail, I take some time to analyze why. What did I do wrong? That’s a good thing to do, right?
Almost always, it’s because I had an idea in my head that just didn’t agree with the market. I am absolutely positive the market will hit this price and I’ll be rich. I am so confident that I move my stop to the next level because I know it’ll come back. I am so confident that I increase my position size at each new level.
Of course the market doesn’t care what I think. Eventually, price gets to the point of no return. When I may as well just hold until I win or until I bust. Usually, it’s the latter.
Sound familiar?
Recently, I was in a trade that was approaching my stop loss. It was at a point where I knew it was going to turn around. I was so confident that I had decided to add to my position and move my stop to the next level. Unfortunately ( or, perhaps, fortunately), I hit the wrong button and closed my position.
I was a little frustrated with myself but then realized it was a good thing. It doesn’t matter if the price rebounded, or not. What matters is that exiting the trade made me realize I can always simply get back in.
That’s when it hit me. I understood that the win/loss percentage is irrelevant. The money that was already lost in the trade was still a loss even if the trade isn’t closed. There’s no difference between holding onto the trade with the hope that it will rebound or exiting the trade and reentering because of a mistake. (other than insignificant margin, of course).
The win/loss percentage is all about ego. The only thing that matters is money gained vs. money lost.
Now, it doesn’t matter if I’m in a position. If my analysis indicated I should be long – and I’m in a short position, I should absolutely exit. It doesn’t matter if I’m in profit or not.
I don’t know how many times I’ve confused what the market “could” do vs. what the market “should” do. I usually stay in a trade because it “could” turn around so I move my stops to give it room to breath. Alternatively, if I think it “should” turn around, then I should stay in the trade and let the stop get hit. Because my analysis was wrong. That is going to happen – it’s part of trading. But that’s OK as long as I’m right more than wrong.
What I can’t do is move the stop – ever. I mean, I can always get back in if I change my mind. So moving the stop because it could turn around is a recipe for disaster. Yes, there are times when it works, but the end of the road when it doesn’t.
Well, got that ramble out of my system!