Updated: Jul 20
15th December 2021
It's well known that in trading, it is important to keep your losses small. The saying is well known: "Cut losers short, run your winners". It's easier said than done, though. I actually find the easier of those two is the cutting losers part. It's the running of winners and maximizing winners that is a lot more difficult to master.
But to make a success of trading, that's what you have to do. You have to be able to keep your losses small (and be accepting of losses) but also know when it's time to press harder on the winning trades.
I liken this to playing poker. I had never been a poker player until last year. That's unusual for a trader, as many traders by nature like to play poker. I have since discovered why. There are a lot of similarities in the principles of what it takes to be a successful poker player and a successful trader.
My interest in poker came about as a result of CoVid and lockdowns. I used to play squash with a bunch of friends in South Africa every Wednesday, but obviously, that ended for me when I left SA in 2019 to move to the UK. However, when lockdowns happened in March 2020, the squash group decided to meet online once a week to play poker on one screen and have a Zoom call on another screen. That meant I could get involved online from England, and it has actually been a fantastic way to keep in touch with my good friends back home. We still play almost every week.
It has taken me a while to get the hang of the game, but I have been getting better as I've learned the principles of what it takes to win in poker. If I have to summarise it very briefly, I'd say the secret to success in poker is to bet meaningfully but fold the weak hands early and bet harder when you have a good hand.
To bring this back to trading, it means cutting your losing trades quickly (but being accepting of the loss as a possible outcome), and pressing harder on the best, high-probability trades.
But more than this, I think the real crux of the matter is to be "willing" to lose on trades and not to fear losing. Also to set your trade size (bet size) at a sufficiently big enough level that your winners will pay out nicely when they do come off.
Trading "not to lose" is a somewhat defeatist, fear-based way to trade. And the corollary of that type of trading is that when your winners do come along, you're probably going to be positioned too small if your bias is not to lose.
Trading To Win
There's a difference between trading "not to lose" and "trading to win".
We HAVE to accept that losing is a fundamental part of the business of trading. It's the price of finding the winners. Much like a restaurant owner has to pay the price for ingredients to make the food he sells for a profit. There are costs to running any business. In trading, the costs are the losing trades.
Something I have been working on with my trading in this respect is to set a minimum risk size that is meaningful enough so that the winners will count. If you risk too small, then you are trading "not to lose". That is fear-based. And it means that when the winning trades do come along, they won't move the needle much.
I think the ideal is to find a level of risk that you can live with, but that makes you ever so slightly uncomfortable.
It's a delicate balance to strike, but is important and is something I have noticed about both successful traders and successful poker players. They trade/play to win, and don't trade/play not to lose.
I hope I have articulated this well. Here is a link to a longer article on the topic that explains it in more detail: https://vantagepointtrading.com/problem-trading-not-lose-overcoming/