Knowing When to Jump Ship

An observational study of 12 million actual forex trades made in the course of one year showed that traders are right more frequently than they are wrong. They win 59 percent of the time and lose only 41 percent.

Yet most traders lose money overall.

How is that possible?

Because their losing trades are 80% larger than their winning trades.

Wow, do you realize what that means?

It means there is a simple tactic to help you and anyone else become a successful trader.

Unfortunately, there is also a desire to “outperform” this simple tactic, and it is the exact reason traders lose money over time.

This desire to outperform, or be "right," is grounded in human nature.

In other words: You are the reason you lose ... I am the reason I lose ... and that "day trading" neighbor down the street is the reason he loses.

We want control – it’s our nature. So we convince ourselves we can do the impossible and outmaneuver the market.

Guilty as charged.

I started winning consistently only after I concluded there was only one thing in which I had some control--how much risk I was willing to take on a trade. I stepped back and accepted this core truth: You don’t need to know what is going to happen next in order to make money in the market. Trading is simply a probability bet. Nothing more, nothing less. 

Before that, I let myself get in the way of success more times than I care to remember. But I’ve been doing this for 28 years because I’ve learned valuable lessons.

The most valuable lesson you can learn is risk management.  

Practice risk management on every trade. Admit you don’t know where the market is going and that your trade is merely a probability bet. Your risk tolerance is simply the amount you’re willing to pay to play.

So get yourself and your ego out of the way and implement an effective risk management strategy with this one basic rule: 

Use a stop-loss with every trade. Period.

That rule is hugely effective.

Using a stop-loss is a simple and effective risk management tactic. 


Use a Stop-Loss with Every New Trade:  “Risk to XX ...”

Define your risk before you enter a trade. That’s the time to choose when you define where you will jump ship if Mr. Market moves against your position; it's when you're most objective.

Placing a stop-loss order simultaneously with every new trade lets you avoid the emotional bias and rationalization that hinder your ability to manage risk properly.

We want control over our success.

We can have it, but only if we understand success isn't determined by controlling how we win as much as it is by controlling how we lose.

Once you control how you lose, you will win.