Losing days

I'm going on about the book, "High Probability Trading" again, so if you don't like it, turn away now!

I keep finding bits in the book that really resonate with me. Today I found a bit about handling losing days. The book talks about how people have a plan for winning days, e.g. making £X a day but have no plan for losing days. The problem comes along when you hit a losing day and then end up chasing losses and over trading trying to hit your daily plan. Link suggests: "...when trying to figure out how much they will make at years end, they kind of forget to calculate any losing days. They assume they can consistently make the same amount every day and totally ignore the losing days. The reality is that they will probably have about the same number of losing days or more as winning days, and the losing days can tend to be worse than the good days".

He continues, "If you are going to have goals for winning days then you should also have goals for losing days and they should be less than you hope to make on a winning day. If $400 is your goal on the upside, you should have a goal of not losing more than, say, $300 on a bad day"

Blow out

In trading terms, blowing out is when you go bust and blow your bank out. Not a pleasant thought, but something that happens more often than you'd like to think and often spells the end to a trader. If you blow out, you don't want to play anymore and your confidence can drop to rock bottom. It takes a lot to pick yourself up, know it is just a set back and start again.

Marcel Link, the author of "High Probability Trading", the book I'm currently getting into, says this about blowing out: "I know people don't want to hear this, but most of the best traders have blown out more than once before becoming the best. I always thought, 'yeah, but not me'. Well, it happened to me more times that I care to remember."

That kind of made me sit up and take notice. When I had made losses, some bigger than I had expected, due to thinking I knew best, I had, in the back of my mind, the thought that if I blew it and lost my bank (as small as it is) then I was not cut out for trading. I've had comments on the blog, when I've mentioned taking a loss or making a mistake, telling me to quit and give up (although not usually expressed so politely!). Well, in the book "Market Wizards" (on my recommended reading list at the bottom right hand side), you find that blowing out is a common early trait among almost all the best traders. As Link says, "It comes with the territory and is part of the training process". He also says, "Blowing out can be a valuable learning experience for a committed trader. It is time to regroup and find out why you lost. The answer will almost always be overtrading or being undercapitalised, but traders need to learn it for themselves"

The bit that really struck me most was when he said, "A word of warning: Most of the time it comes after a good winning streak". This resonated with me, as the biggest losses I've had have always been after a winning run.