Trading is the only profession in the world where winning can sometimes be bad— and losing good.
For example, making money on a trade based on pure luck…
Some traders may think of it as skills, gain false confidence, and decide to take the trade again (but for much bigger size)…
That’s what I mean by winning sometimes being a bad thing…
Check this out…
This past week I managed to spike a monster LottoX trade on SPY puts…
With a little help from the Federal Reserve announcement.
But you know what?
I was mad – because I didn’t follow my rules.
Instead of scaling out of the position as I advocate for, I took it off all at once.
That meant leaving money on the table.
You see, I don’t determine my success and failure by the profits and losses, but by the decisions I make.
And here’s why you should as well.
Humans aren’t that much different than other animals. We learn things through reinforcement and feedback.
Do well on your spelling test, get a trip to Chuck E’ Cheese.
Trading provides us constant feedback on our performance in the form of profits and losses, not to mention little dings and lights like a casino.
The problem is trading isn’t a direct response exercise. Just because something works out doesn’t mean you did it right.
And yes, I understand how weird that sounds, but stick with me here.
Every time I take a trade, I can’t tell you for certain whether it will work out or not.
All I can tell you is the likelihood of it working and how much I can win or lose.
Everything I do is a giant exercise in probabilities and capital management.
So, how is this a problem?
Imagine you have the world’s worst trading strategy that works only 1% of the time. Unbeknownst to you, the day you enter the market happens to be the perfect conditions for it to work out.
Hundreds of dollars richer, you get excited about your new found glory. So you try it again.
By some infinitesimally small chance, it works again.
Now you know you’ve got a winner right?
You start upping your stakes, even in the face of loser after loser, until you’re penniless and begging for scraps.
Remember this: Just because you made money doesn’t mean you made the right decisions!
With everything having a certain probability of success, sometimes luck runs on your side.
Here’s the difference between luck and strategy.
Over time and many trades, strategy makes money.
This is the precise reason I tell traders to journal everything. With an honest log of what was traded, you can take a step back and look at the whole picture, seeing whether the strategy works repeatedly and reliably.
Sometimes losing is winning
Remember how I said I was upset with myself on a day where I made a lot of money?
Rarely do I look at my profits and losses during the day, only at the end of the week.
Between Monday and Friday, I’m laser-focused on taking the right trades.
I know that not every trade works out for me. That’s part of trading. Believe me, I’ve had weeks of bad trading.
Heck, once I lost $20,000 in one day, one of my worst losses, and I was thrilled!
Yes, I was thrilled. That day came right before the market crash in March. So, yeah, I took a hit. But I saved myself a heck of a lot more cash than I lost.
Any dollar saved is just as good as a dollar made.
Any dollar left on the table is just as bad as one you lost.
Now, I know it can be difficult to determine if you’re winning or losing because of decisions or luck.
There’s two key ways to figure this out beyond your journal.
First, look to see if you risked the correct amount of money. If you won big because you risked more than you should have, then you need to scale back the next time.
The second and easiest way – bounce the idea off of someone. Believe it or not, writing it down or saying it out loud is sometimes all it takes to realize whether what you’re doing makes sense or not.
Not only do you get to check out my trades in real-time, but join a weekly live training session where we get together and discuss everything from trading techniques to risk management.