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5 Habits of Winning Traders — No. 2: It Is OK to Lose

The guy had made tens of thousands of trades.

When Jack D. Schwager asked him if there was a single trade that stood out, he didn’t hesitate.

“Yes, the 1979 cotton market.”

Paul Tudor Jones was a broker at the time. He recalled how that single cotton trade lost his speculative accounts 60% to 70% of their equity.

Jones’ experience was documented in 1989, when Schwager pieced together trading wisdom in a book titled Market Wizards: Interviews With Top Traders.

In it, Jones summarized why the 1979 cotton trade stood out to him.

“One learns the most from mistakes, not successes.”

Such is life.

Like a bull market, the path to success is not a straight line.

We should expect setbacks and learn from them … so that they propel the next leg of our path to the prize.

“It Is OK to Lose in the Markets”

The last interview Schwager included in Market Wizards was with Dr. Van K. Tharp.

Dr. Tharp surely was not surprised by Jones’ sentiments about his big trading mistake…

Dr. Tharp is a psychologist who made a business consulting traders and investors.

To learn more about this belief, watch my YouTube video below. You can also click here, to be redirected to it.

Last week, I explained that he found successful traders believe money is not important.

That was the first of five beliefs common among winning traders:

  1. Money is NOT important.
  2. It is OK to lose in the markets.
  3. Trading is a game.
  4. Mental rehearsal is important for success.
  5. They’ve won the game before they start.

Today, let’s jump into the second belief … that it is OK to lose in the markets.

In fact, it’s not just OK. Losing in the markets sets us up for victory.

3 Mistakes Every Trader Should Avoid

Most mistakes are made after a trade is entered.

But two major mistakes are made before a trade is entered.

Paul Tudor Jones made one of them. It led to the most important lesson he learned from his 1979 cotton market disaster.

No. 1: Never overtrade.

Jones traded too many cotton contracts in 1979. And his accounts suffered.

He said that trade almost made him quit. That’s how bad it was.

Instead of quitting, he learned from it.

Now he’s worth nearly $5 billion and is ranked by Forbes as one of the highest-earning hedge fund managers ever.

When we size our trades properly, we avoid account-killing risk.

We must not make a single trade that can wipe out most of our account.

Otherwise, it will never be OK to lose in the markets, and we’ll never develop a profitable mentality for losing.

No. 2: Don’t let risk exceed reward.

Don’t make a trade that literally isn’t worth it.

Think about how you determine whether a trade is worth making…

Ask yourself:

The reward must be worth the risk.

Before you enter a trade, the potential reward from a trade should be at least three times larger than the potential risk.

Without proper proportions, it will never be OK to lose in the markets because losses will overwhelm wins.

No. 3: Don’t get emotionally attached.

Existing trades are fraught with danger … unless we believe it is OK to lose.

Once we place a trade, our emotions turn on.

Our emotions hate losing because they equate losing with failure and being wrong.

No investor — nor person — wants to admit to either of those things.

If we lose money, we’ll live. But if we lose our identity, we’ll crash and burn.

When our emotions take over, an investor’s identity depends on a trade succeeding.

If an investor can’t take a small loss, it will become a big loss. Big losses are harder to take. And when an investor can’t take that big loss, it becomes an account-killing loss.

Avoid the Big Mistakes and Trust Your Trading Plan

Dr. Tharp found that successful traders trust the plan.

The plan is a system of rules and strategies that help avoid major mistakes.

A plan establishes a framework for long-run success that eliminates the tendency to overtrade or place trades that aren’t worth the risk.

A plan employs a methodology that takes the emotion out of trading.

When we avoid these big mistakes, losing is OK.

What doesn’t wipe us out, makes our trading account stronger.

How we think about investing is important to success. So, stay tuned…

In two weeks, I plan to explain the third belief common among winning traders: Trading is a game.          

Good investing,

John Ross

Senior Analyst, Banyan Hill Publishing

P.S. If you’d like to be notified whenever I post new videos to my YouTube channel, just click here, and hit the subscribe button.

 

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