Traders are always trying very carefully to enter only into "winning trades" so much that you often don't know what to do when faced with a tenacious losing streak.
I'm going to suggest something most of you will consider highly unusual, but there is a rhyme and reason to it: deliberately enter into a losing trade, let it ride much longer than you would normally be comfortable with, and then begin the process of working your way out of it. Experienced traders: do it with real money. Inexperienced traders: do it in simulation.
The purpose of this exercise is to force the kind of ugly trade that eventually will happen to you, and to see how you handle it.
There's many reasons I consider this a very good exercise:
1. Puts your trading strategy under scrutiny, you get to look at its weaknesses and figure out how to correct them
2. Lets you know whether or not you are actually capable of recovering from such a loss. It's better to know this sooner rather than later.
3. Helps build fortitude and endurance.
4. Gives you confidence in your methods and makes you realize that successful trading doesn't necessarily need to start out "on the right foot."
Traders almost always are striving to "be right" - choosing the "proper" time to enter a trade, the "proper" time to exit, always wary of markets showing them that they are "wrong." But this is not necessarily the correct approach to have all the time. Sometimes the amount of planning, intuition and foresight you have, matters not one single bit. The markets are so unpredictable as to make all of that stuff almost worthless sometimes.
What happens if instead of planning and waiting for the right time to enter your next position, you simply get into it with no rhyme or reason - you flip a coin and buy or sell short. Can you make it work? Let it go against you for 100 ticks. Do you have what it takes to work your way out of it?
In a very real sense, I would argue that if the thought of doing this exercise, scares you - then you should probably not be trading. In order to make a successful go of trading, you must have the confidence and technical ability to pull yourself out of this type of situation and emerge a winner.
don't be "walking tippy-toes" every time you approach the markets. Identify the worst case scenarios and make sure you strategy can handle them. For some, a "worst case" would be 20 losing trades in a row. For others it would be a single big whopping loss. Be sure you are honest and realistic about which "worst possible scenarios" can happen, always keeping in mind that it doesn't ahve to be a single trade - it can be a series of losing trades that puts you into a deep hole.
Another beneficial thing about this exercise is that it teaches you patience. Things aren't going to always go your way. You aren't going to always be able to recover from losses quickly. Sometimes you have to wait a lot longer than you would like.
Yeah, conceptually, the people who would benefit the most from such an exercise already do it on a regular basis anyway. You do it until you don't and then there is no need to try to do it on purpose, cuz you have done it many times already and have moved past it.
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This has happened to me more times than I care and it was not intentional. My darker part kept its grip on with tenacity and that's how I ended up with big losers in the past.
I did not cut them immediately and then analysed 'objectively' that if I had not been in position it was time to put on a reversal trade anyways so held on more.
Eventually I closed some trades and came out of it smelling of roses.
However eventually a trader must get to a point where losses are controlled and risk is accepted - the above exercise reinforces reactionary behavior (while it is good to have good reflexes it is even better to avoid confronting the tiger in the first place).
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You don't. What I'm saying is, enter a trade you would not normally enter under any circumstances (because it most likely would be a losing trade according to your strategy).
You get the gist of what I'm saying, except that the people who would benefit the most actually don't do it on a regular basis - they're the ones who try to avoid it as much as they can, which paradoxically means they are the least likely to be able to recover from it.
In other words, one must practice "losing" in order to learn how to recover from losing.
Actually it's much more beneficial than you realize. How do you know you are capable of recovering from a large loss unless you put yourself to the test?
Of course I have losing streaks. All traders do. I have them all the time. In fact I sometimes view my trading as a more or
less continuous act of getting out of losing trades.
I get what you're saying and I agree with most of it, but this last phrase needs a little analysis... Yes it's nice to try and avoid the tiger as much as possible, but there's two problems with this:
(a) realistically it's impossible to always avoid it, so you need to know how to handle it those times when you find yourself caught
(b) by continually trying to avoid losing, you emotionally reinforce your aversion to "loss." This can be quite a bad thing because losses are a natural and necessary part of trading.
* realize that you can recover from losses, even sustained ones or large ones, as long as your methods are sound. And if they
are not sound, then this exercise will tell you that you need to fix them
* losing trades and losses are and always will be a part of trading, and therefore there is no point in being fearful of them.
As I mentioned before, the exercise is primarily for beginning traders, but experienced traders may occasionally need reinforcement
It would be nice to get a lot of responses on the poll. In my opinion, novice and intermediate traders are more likely to answer "it's a bad idea" while very experienced traders are more likely to say "it's a valid exercise."
Last edited by mwtzzz; February 23rd, 2013 at 10:27 AM.
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Yes, as an Intermediate trader I have definitely picked 'horrible idea'. But the discussion has much merit and it has certainly given me food for thought in the Trade Management area.
When I get my number of accidentally absolutely lousy trades down then I'll adopt it as a 'good idea' and switch to deliberate ones.
As an aside my own approach is simplified very much to just ease out of a trade as soon as it feels wrong - I never move my stop (this one took ten (yes 10) years) but I will move my limit down to breakeven if I take unexpected heat and think it will re-visit. If it hasn't gone in my direction within 5-10 minutes I just kill it anyway.
When you say to experience working your way out of a badly losing trade, I'm not sure I understand. The two main options are to keep adding to a losing position or hope and pray that it comes back in your favor.
Years ago, I went into a pound/yen trade and foolishly let it go way against me..because I stupidly thought, "It had to come back !" It never did. I held it for days stubbornly as it continued to slide down 1000's of pips ( this coincided with the Dow meltdown back in 2008.) I lost my entire account of $20,000.00 on that one trade.
So I would say I am strongly opposed to fighting my way out of a losing trade. I think a better exercise is to watch tradeshit your stoploss without stress or fear. Train for discipline that you will not move your stop no matter how badly you believe that "This trade just needs a little bit more breathing room. "
So I guess I am not in favor of this exercise mentioned for this thread because, in my opinion, it is reinforcing the idea of trying not taking a loss . And that can lead to account suicide.
Failure is not an option
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