At first glance many people think the better traders, the ones who make all the money, do so by enjoying more winning trades and/or trading at better prices. So when you or I buy a share at £4.50 and sell it at £5.00 these better traders buy it at £4.25 and sell it at £5.25.
But in my experience this is often not true. Look at the following example -.
- Trader A and Trader B meet at the end of the year to discuss their trading.
- Trader A reports that he made £100k for the year while Trader B reports a profit of £50k.
- Both want to improve their trading records and so visit a ‘trading coach’.
- The coach tells them to make two separate piles of the past year’s trading statements and put all their winning trades (whether £1 or £1,000) in one pile, and all their losing trades in the other.
| What Coach sees in relation to Trader A and Trader B is this: | ||||
| Outcome | Trader A | Trader B | ||
| Winning Trades | £150k | £150k | ||
| Losing Trades | £50k | £100k | ||
| Net Result | £100k Profit | £50k Profit | ||
The coach tells Trader A that he is very effective at making money and very ‘effective’ at not losing too much.
But the coach has an important observation for Trader B – he shows him that he’s just as effective at making money on his winning trades as Trader A but overall his trading falls down on the amount he loses. So if he can reduce his losses by just 25% his overall profit could rocket by 50%.
This highlights the point that making more money is not all about picking more winners. Yes, of course this will help but I think it’s far easier to pick less losing trades than it is to pick more profitable ones.
Summary
Many years ago I befriended a great trader somebody who had unbelievable market ability. When anyone asked him the secret to his success he always replied -:
‘Every morning I get up and screw my head on backwards’.
What I think he was alluding to was the more successful traders approach the markets from unconventional ways. Trying to increase your net profits by cutting down on your losses is one such unconventional way because the majority of market participants will normally always look for more or larger winners.
I hope you’ve found this short article interesting and it’s given you something to think about.
