Wins and Losses (Every lesson within the Trading Tips link is a full tutorial, click on each preview to expand).
Wins and Losses – anyone trading will experience that, ANYONE! That is true of the most experienced professional as well as the greenest novice on the globe. Even the snake oil vendors who promise trading success “worth $150,000 with a 30 minute effort one night a week,” admit something less than 100% success from their system. We will have losses, I will have losses, you will have losses! Additionally, we never know where or when they will show up. That, dear friends, is the reality of trading in the market place.
A great majority of investors find comfort with their money stashed away in the market. Why has the market been so popular for so long? It has returned an average of about 10% each year for over 80 years. What a great place to just put your money and forget about it. The market has been, through the years, the default repository for billions of dollars in mutual, retirement, insurance fund monies, etc., etc. But what about the losses? The operative word in the 10% reference above is “average.”
Because of the upward growth of the U.S. economy over these years, the average of the trading and investment wins and losses returned the +10% figure. In the mutual fund arena, each fund invests in dozens, even hundreds of different companies, providing diversification. Sure, there have been losses, but always more wins than losses! This is how the investor can sleep at night, leaving the managers of their fund to shift dollars around to maintain the positive averages.
Now, let’s do a little exercise. Suppose as a young high school graduate we started our first job and stashed $20 away every week. Let’s see, after one year (50 weeks, for the sake of argument) we would have $1,000. If we did that for 40 years, the amount would increase to $40,000. But that would be the result if we put the money in a sock. What would happen if we put that money to work those years, drawing interest? Figure 1 shows the result, for different return rates. Not a bad retirement plan!
Think for a minute what we’ve shown. Because of the magic of compounding, where the interest draws interest draws interest…, we could become millionaires while flipping burgers at Wendy’s.
Albert Einstein once observed that the most powerful principle in this world is that of compounding interest. But that’s another story. The purpose of this example lies in the numbers on the chart in Fig. 1. Ten percent is not a bad return for the mutual fund gang, or wasn’t until the last 10 years. In our interest chart above, that would turn the $40,000 investment into about $400,000. But here’s the point: 12% (a measly 2% more) would double the return (nearly $900,000)! While we’re looking at the chart, what would 15% do to our return? Over four times as much, $2 million! When the brilliant financial manager Peter Lynch, formerly of the gigantic Fidelity Magellan mutual fund, averaged over 26% a year for 15 years, many heads went up. That rate would turn our $40,000 into over $50 billion. Higher rates of return are better!
This, in part, is what drives the trader to trade, to move in and out of the market, seeking an edge, taking higher risks than the investor who is happy with 8%. The market pays for the risks taken; higher risks, higher potential rewards (and higher potential losses). That said, since we know we will have both winning and losing trading experiences, in behooves us to accept a strategy that stops the losers and runs with winners. We win with more winners than losers. In the words of a Wall Street axiom, “Cut your losers short and let your winners run.” That is really simple and sound advice. In this manner, all of our losers will be small. Many (even most) of our winners will also be small. That creates about a wash financially. The money will then be made on the few big winners that show up from time to time. Many successful in trading, claim their losses actually outnumber their gains, but they make money with a few killings and no large losses.
By properly managing our positions, we can come away with higher returns. How much higher rests on our ability to do three things: First, find a plan that works for our own personality, second, have the inner strength to follow our plan, and thirdly, keeping an open and creative mind to adjust to the changing market personality. This is very simple, but it is anything but easy…unless you increase your learning curve in trading.
The first issue requires the most time, finding, trying, using, testing, trading, different strategies and plans. It has been said that the difference between success and failure in the market is razor thin with the balance tipped predominantly to those that learn as much about themselves as the market. For example, if you’ve learned the importance of cutting a loss short, there is only one thing that can go wrong. You! You are the only weak link in the chain, by hoping the stock price will go back up, by hoping for hope. Trades can and do go against us. But we never have to accept a big loss.
These subtle mind-games can lead us to success, as we learn what for us works best. One size does not fit all. The inner strength in the second step comes with the territory as confidence becomes our trading companion. By setting and executing stops, learning to create setups, exercising “If – Then” scenarios, scanning for higher probabilities, listening to quiet market voices, and managing positions, we will gain that strength. Lastly, keeping an open and creative mind comes through experience and study, finding as many viewpoints as possible and looking at every situation through many focal angles. Again, this is very simple, but not easy.
Our book, Provident Investing, was written with all this in mind, emphasizing the importance of Paper-trading to provide experience in many strategies. One gentleman I worked with years ago paper-traded with diligence for over a year before he invested his first dollar. He was manager of a grocery store at the time, he now trades for a living. I know, many market pundits pooh-pooh paper-trading, saying it’s not the same as investing with real money. Guess what, nothing is the same in practice as the real thing. But does that mean we should never practice first? Give me a break!
So, it has always been Pro-fundity’s mission to help, to provide an internet forum for individual investor improvement; We never make recommendations, rather we provide a training ground where members can create setups, consider risk/reward ratios, exercise trades with different stop levels and help find a system they find comfortable. The ideal Pro-fundite will find potential picks (through the day, week, month), highlighting those that appear ready for action, flagging others need to move a bit to satisfy risk/reward levels or to meet other entry criteria.
The Pro-fundity mission is designed to help you, the individual trader, make your own decisions for your own benefit. Who cares as much about your own well-being as you? This is where those critical decisions should be made, apart from the forces of political, economic, marketing agendas where someone else, something else is more important than you! As you develop these skills to think for yourself the rewards will follow. Know the truth and the truth shall set you free. Free from what? Ignorance!!
We believe most traders have the native intelligence to benefit from this training approach, finding a trading system that perfectly fits their own personality, without going broke in the process. Each trader brings to the table his/her own risk tolerance, expectations, intuition, training and a host of other issues. All these, taken together, make each of us very unique and different. We need to match the trading system with that uniqueness. Further, no successful trader simply follows the guidance and direction of someone else.
The greatest traders are those who learn to think for themselves. In this regard, we worry about those who want nothing more than to be told what to do. Sorry, that is not Pro-fundity’s role. Our role is to encourage trial, error, success, failure, realization, discouragement, joy, and all the accompanying emotions. We realize this is an emotional head-game. Understanding that is requisite to success. And we can share our joys, disappointments, frustrations and the “learning aha’s!” in this trading forum. Welcome.”