I’m forever telling my kids that they shouldn’t worry about getting things wrong … that if you never make mistakes, you’ll never learn … that you shouldn’t be afraid to give the wrong answer – in fact, it’s mistakes that often lead to breakthroughs and new solutions …
And as traders, we’re taught that we’re going to be wrong. Not just occasionally – but a considerable percentage of our trade decisions will be wrong. Maybe 40% of them … 50% of them … 60% of them …. We’ll have to take these losses along with our winners – that’s the way the trading cookie crumbles.
However, there’s a difference between learning from our failures, and blindly ploughing on regardless, leaving a trail of destruction behind us.
I read an excellent article earlier this year, about how tennis players win. There’s a clear difference between how professionals win … and how amateurs win.
The professions gain advantage by forcing mistakes in their opponents – i.e. it’s their actions that give them the win.
Amateurs, by contrast, win by playing safe and waiting for their opponents to make stupid mistakes.
It’s a subtle distinction – but an important one for those of us who do want to win in the markets. And – whatever we might like to think – most of us are amateurs at this game.
So, our strategy for winning should be to avoid mistakes.
I’m not saying anything controversial here. Probably the most often repeated quote in trading is Warren Buffet telling us “Rule number one: never lose money. Rule number two: never forget rule number one.”
And yet, most of us – if we want to improve at anything – focus on the things we can ADD to improve our performance. We want to learn more to be smarter … we want to earn more money … we want to run further … eat healthy foods …
These are the ways we naturally see that we can boost performance.
We could be smarter by avoiding mental errors … we could be richer by not losing money … we could be fitter by not skipping workouts … and by avoiding unhealthy foods.
These goals may not sound as exciting and dynamic. They don’t have the same ‘mantra-like’ ring to them. But they do have a crucial advantage over the ‘addition’ goals …
… they are normally easier to achieve.
In the case of trading – your end goal is to be more profitable. It doesn’t matter whether that’s achieved by winning more … or by losing less.
Let’s go back to the tennis analogy … because if you’re trading, you’re in the markets playing directly against other traders. The way to win is not to outsmart them, but to play it safe and wait for them to make mistakes.
I have NEVER met a successful trader who isn’t deeply conservative with their risk profile.
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