Many traders who start out focus on being right and fall into this pattern. They let their losers ride and cut their profits short and believe that as long as their indicator is accurate often enough they will be successful traders, as you can see in this example this is not the case.
This occurs more often than you can ever imagine and believe it or not there’s reasonable explanation for why this occurs. People are conditioned to associate success in the market with the accuracy of their trading. They believe if they win more often then they lose then they’ll be successful, they believe that “winning” is the secret to making money; the majority of people don’t proceed further. Their focus on what is necessary to succeed stops there.
The majority of people bring to “trading” the same attributes that have made them successful in their lives, and that is their competitive “winning” nature. People by nature love to compete and love to “win”: “winning” at sport. Winning in business, winning in all aspects of their lives, its basic human nature. However to “win”, also means to be “right”. We have been taught from an early age that a good grades at school is far better than a low grades. This continues later in school when a higher exam score is better than a lower exam score, and the only way we’re able to achieve higher scores is to be “right” more often than not!
So we have been conditioned about the importance of being “right” throughout our lives. Instinctively we want to;
• know the “right” answer,
• buy the “right” car,
• purchase the “right” house,
• purchase the “right” insurance coverage
• select the “right” school for our kids,
• pick the “right” 401k plan
• pick the “right” lottery ticket
Unfortunately, it’s this one powerful characteristic that most people possess that works against the objective in making money trading. This is because the significance or consequence of loving to “win” and being “right” pushes most people instinctively to pursue a high winning or high accuracy trading method or indicator. People instinctively gravitate towards swing trade methods that have an 80% to 95% accuracy rate. Yet for trading as seen by my example using a high ratio of winning trades, wishing to “win” and being “right” isn’t that important, and if anything, can work against your objective in making money.
Creating a method with high expectancy is the far more important than having a high percentage of winning trades. . And this goes for all traders, regardless of whether they’re discretionary or mechanical. Unless we as traders know that our methodology produces a positive expectancy, then we’re doomed to failure from the very start and we can forget all about money management and psychology or any other aspect of trading. Trading with Negative expectancy is like going to Las Vegas and trying to win from a casino on a consistent basis, without cheating, it’s statistically impossible.