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FEAR AND HOPE IN TRADING
Traders tend to fear losses more than they value gains. As a consequence, they will take greater risk and gamble in a losing situation, holding on to a position in hope that prices will recover. In a winning situation, the circumstances are reversed and the trader will become risk averse, and quickly take profits – too quickly.
Losses, made at an earlier time, may predispose the trader to take risks. They are more risk seeking than they would be if they had not made the earlier losses. This effect is known as “the sunken cost effect” and results in “throwing good money after bad” in order to make up the loss.
Lefevre said in 1923: “I did precisely the wrong thing. Cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out……Of all speculative blunders there are few greater than trying to average a loosing game…..That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse”.
He goes on to say: “….fear keeps you from making as much money as you ought to……instead of hoping he (The successful trader) must fear, instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in (stocks) the way the average man does”.
With the Trendway Emini Trading System, the loss is kept relatively small, and the wins are up to 3 times the value of the losses. In this way, even if the successful trades were less than 50%, money should be made. Then if the “fixed ratio approach” is incorporated into your trading plan, you are on your way to untold heights.
You must have the discipline and patience to trade according to the rules, on each and every trade. Once you start to insert subjective choices (picking and choosing according your hopes and fears) into your decision making, you are on your way to oblivion.
Author/trader Jack Schwager has published two bestsellers, Market Wizards (1993) and New Market Wizards (1994)..
In it he says: “….The one thing separating these future “market wizards” from other losers was their ability to learn from their mistakes by analyzing the risks they had taken, to develop and launch strategies for never letting themselves get stuck in the loss-trap again”.
Learn from the “wizards”. Learn to take losses. They are an integral part of trading. Just keep them small, and your profits will grow accordingly.
GO WITH A WINNER…………….END UP A WINNER
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