As market participants we all know – or should know – that we are going to be wrong the majority of the time. If you haven’t accepted that fact yet, then you are probably enduring a lot of mental anguish every time a position goes against you or when give your opinion on something and turn out to be wrong. I learned early on, after taking losses on a number of stubborn trades, that as a market participant it is not about being right or wrong, but instead solely about making money. That’s right, we’re not in the business of page views or the business of selling research, but instead we are in the business of managing risk and making money. Once you accept the fact that nobody can predict the future and that you are not trying to, nor can you achieve a 100% success rate, you can preserve your mental capital, sanity, and focus on managing risk.
Now that we got that out of the way, you’re probably thinking, “If you’re wrong most of the time, how do you make any money?” That’s a great question, and the answer is by being wrong for the right reasons. Another vague statement, I know, but stay with me for a sec. If you’re approaching financial markets with the objective of making money, you should have a tested strategy that you are using to approach the markets based on your time-frame, skill sets, personality, risk tolerance, etc.. The idea of having a plan is to keep you focused on the setups you are best at making money at while managing risk in a way that cuts your losers for small losses and allows you to fully capitalize on the trades that work out. This looks differentlfor everyone based on their process, but the general concept is the same.
In case the paragraphs above weren’t clear enough to resonate with you fully, I’ll provide an example of what being wrong for the right reasons looks like.
On November 9th, 2014, I did a post on the best setups headed into year and in 2014. To view it, click here.
I’ll sum it up for you, the setups were as follows:
1. Short Dollar Index
2. Long EUR/USD
3. Long Platinum & Gold
4. Long Heating Oil, Gasoline & Crude
5. Long Cotton
Now for any of you that weren’t paying attention to markets in the two months following that post, I was completely and utterly wrong on ALL of them. In fact, if I was an analyst, I’d probably have been out of a job a few weeks ago. So why am I celebrating the fact that I was wrong on these setups? Because they were all setups that had exactly everything that my process looks for in a trade. Additionally, because of the risk management process that was included in all of the setups, if the trade was triggered (which only 2 of them would have been) , I would have been stopped out for miniscule losses.
The Bottom Line:
There are a million ways to lose money in the market if you’re not careful so next time you’re wrong, make sure you’re wrong on setups that fit your process so that your risk management parameters get you out of trouble before a paper cut turns into a devastating loss.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.