The Losing Trade Paradox: Why Deliberately LOSING Money Can Ultimately Accelerate Your Profitability
When you first get into trading it’s so easy to be dazzled by the promise of overnight riches. It’s certainly enticing, but I think over-hype can do the beginning trader a great disservice.
That’s why I think deliberately trading to LOSE can be one of the wisest investments a trader can make at the start of his career.
It sounds a bit odd doesn’t it? It’s the polar opposite to what we’re trying to achieve: we want to make money not lose it!
But the psychology behind the idea I’d like to share with you today can make losing trades one of the best long-term investments you can make.
So let me lay it out for you…
Now if you’ve ever considered Forex trading as a serious tool for building your wealth, you’ve probably been through the following exercise on more than one occasion…
Putting the finishing touches to the spreadsheet that plots your rise to Forex trading glory, you sit back in admiration… If you can just average the 2% return per trade your spreadsheet predicts, you’ll be into six figures within three months. That’s not too difficult right? After all, the new trading system you’re buying into claims a 98% strike rate and hasn’t taken a loss over the last 362 trades – this time next year you’ll be a trading millionaire!
Nice in theory!
Now here’s the case for why you should probably take a step back, measure your personal ‘trading temperature’ and avoid giving your confidence a mauling by launching an initial mini-campaign that deliberately LOSES money.
And let me clear one thing up first: when I say lose money, I don’t mean your entire trading bank or even the amount you’re prepared to risk on a normal trade, but it’s got to be enough to matter – you’ve got to feel a little bit of pain!
What you stand to gain…
There’s no doubt that trading is driven by mathematics.
Probability and the law of averages dictate the outcome of any given trading system, and there are certainly mathematical patterns identifiable in the way that the markets move. But what is almost always underestimated and even completely overlooked by those new to Forex is the emotional and psychological aspects of the ‘inner game’ of trading: the things that go on in your head.
Be in no doubt, your mind can twist otherwise straightforward decisions beyond recognition once money – and the risk of losing it – becomes part of the equation.
It’s why paper-trading is so different to trading under real market conditions.
The biggest hurdle many traders must overcome is the anxiety felt when a trade heads off in the wrong direction and puts you in a losing position.
I know from experience the range of thoughts and emotions you can go through lurches between anger, frustration, disbelief, denial, a desire to immediately exit the trade, and an attempt to take a ‘revenge trade’ in the other direction… all of which threaten to assault your self-discipline.
But the basis of a well-designed system is that it already has trading losses built in – your only job should be to pull the trigger and let the trade play out, win or lose. You shouldn’t need to give it another thought. But that’s not always so easy to do!
Here are some well-meaning market-mantras you may have come across before. Reciting them to yourself can certainly help get you in a better frame of mind, but the little exercise I’ll share with you in a minute will actually PROVE just how true their wisdom is.
- ‘Love Your Losses‘ – Learn to take losses on the chin: they are just a part of the game. And remember… each losing trade brings you one-step closer to the next winner!
- ‘Trade Your Edge Like A Casino’ – Have confidence that following X ‘spins of the wheel’ the laws of probability will kick-in and deliver your expected return: treat your trading system like a casino treats a profit-producing roulette table.
- ‘Trade for Expectancy, Not Accuracy’ – The number of losing trades your system takes is irrelevant: it’s the monetary expectancy per trade that holds the key. You should jump all over a system that takes 70 losing trades out of 100 if the losers hit you for £60 but the winners each rack-up £240 per trade. Can you see how the money is made there, despite recording so ‘few’ winning trades?
Now I’ve often thought about how much time, money, and emotional despair would have been spared in my early years of trading if someone had sat me down and given me a step-by-step plan to toughen me up a bit and expose my ego to the reality of trading.
But I had a bit of a freakish start to my Forex trading career… I made money, good money, week after week. The problem was my discipline was non-existent!
I was fully loaded and exposing myself to huge risks; gambling on the outcome of economic reports and firing off trades all over the place because I couldn’t come to terms with taking losing trades.
And I got away with it… for a short while anyway!
But knowing what I know now, here’s the simple three-step ‘antidote’ that I would gladly take in my first week of trading if I had to start again from scratch.
It’ll ensure I get over the initial resistance to taking losses, give me an edge on other entry-level traders and align me with the ‘smart money’ traders as quickly as possible…
A simple three-step ‘winning through losing’ exercise
1) Think of something you like to treat yourself to occasionally – a meal out with friends, a designer shirt, a couple of fine cigars. Write down the monetary equivalent – this is the amount you are going to try and lose and write off as ‘market tuition fees’ – and then divide the amount by three.
2) Look at a daily chart of your favourite Forex pair but don’t over-analyse. If it looks like it’s in an upward-trend, place a market-sell order and place a stop-loss above the current price equivalent to one-third of your overall total ‘market tuition fees’, and place the opposite corresponding order if the market looks like it’s going down, i.e. you BUY hoping to take a loss.
3) Let the market take out your stop-loss order and give you the loss; if the trade is still running at the end of the day, cover it with a market order so you walk away flat.
If you’ve accidentally made money on the trade, throw it into the pot and divide the new total up ready for your next ‘winning through losing’ trade.
So what’s the point of losing money on purpose?
The idea is to string a minimum of three sequential losing trades together in quick succession and feel how the losses feel without allowing excessive negative emotions to come into play.
You’re learning how to take losses unemotionally, and in a controlled environment.
I cannot emphasise how much of a positive impact this can have on your future success.
This is you willingly making a small investment in your Forex trading education through live experience.
Now I know what you’re probably thinking: Lose money on purpose – is he crazy? I’m off to buy the latest fail-proof indicator so I don’t need to even think about taking losing trades.
But know this: the markets have some very weird ‘anti-logic’ forces running through them. It’s survival of the fittest at an extreme level and what appears to be an act of self-preservation in the outside world can often have the very opposite effect in the markets.
And paradoxically, what appears to be an act of self-sacrifice can actually be the most long-term life-embracing action available to you!
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 13th January
15:30 USD Crude Oil Inventories
Thursday 14th January
12:00 GBP Interest Rate Decision & BoE Meeting Minutes
Friday 15th January
13:30 USD Core Retail Sales
Monday 18th January
All day USD Holiday – Martin Luther King Day
Tuesday 19th January
02:00 CNY GDP
02:00 CNY Industrial production
09:30 GBP Consumer Price Index
10:00 EUR German ZEW Economic Sentiment
10:00 EUR Consumer Price Index
We’ve quite a sparse week ahead on the data front, Bank of England interest rate decision and the meeting minutes will attract market scrutiny. And there’s also a bit of stuff due out of China in the early hours of Tuesday: Chinese GDP and Industrial production. That will also attract a bit of attention with all eyes on the economic slowdown over there – might be an idea to tighten stops in USD markets before going to bed on Monday night!
Until next time, happy trading!