My trading apprentices (there is a waiting list, I’m full up, before you ask) have posted me some great questions and I thought I would share them because they must be relevant to you too.
Q: If the majority of profits by professional traders and investors come from a few trades, then presumably that puts a different spin on how we should view taking a loss.
A: It is true. Most people don’t realise that for professionals 80% of their profits come from just 20% of their trades. It is not a case they are right and winning all the time. It is also not the case they only ever make big wins.
Only the wealthiest and best traders understand this. What they understand is that most of the time a trader makes only a little if he makes a profit. Most trades don’t make big profits. They make a small gain then turn. So the trader does not hold on, wrongly believing all trades should make big profits, so he should just hold on and on until it does.
He knows from just looking at the market, that most of the time it makes small gains then reverses direction. The good trader, trades with what exists in the world, not how he wishes the world was with every trade bringing big profits.
So the successful rich trader knows some of his trades will make a small profit and turn, and so he is willing to exit, and happy with his small profit.
He also knows, the price to play the game and hope for that 20% of big winning trades, is that some will make a loss. Again, he does not hold on, hoping that all trades will be big wins and until they are he just holds and holds. That is not the real world. You can pretend the real trading world does not exist.
So he is wise enough to know to sell at that small loss; knowing a big loss is only eating away at his big eventual win.
It is this, thinking like a trader, this mindset shift which makes a big difference between the rich and poor trader.
The rich trader knowing the above does not give up or get despondent when all his trades are not big wins. He knows that the best he can do and control is make sure any losses are kept small.
He does not see a loss as the market out to get him, or a personal attach, or something that steals his get rich quick scheme. He sees it as part and parcel of what every billionaire hedge fund manage deals with, and if it is good enough for them, then it is good enough for him.
Alpesh Patel
www.alpeshpatel.com/go
