I would say that most traders who lose money mentally understand this example. It isn’t too difficult to grasp that if a winning trade is multiples larger than a losing trade, you don’t have to be right too often to make money. Most traders are simply unable to do this, however. Simply said, people don’t like being wrong. We tend to have unhealthy egos which prevent us from quickly admitting mistakes, but this is exactly what must be done to successfully trade.
What typically occurs in the trader’s mind is rationalization. He invents a myriad of excuses to stay in a trade rather than cutting his loss:
- “But on a larger timeframe it’s still trending upwards”
- “It will turn back around, let’s just look at it next week”
- "I heard that someone big will be buying soon, so I'll wait for that"
- “I’m still outperforming buy and hold”
Each of these excuses fails to account for the fact that as a trader, you are in the absolute game, not the relative game. A trader’s sole job is to make the equity curve go from bottom left to top right:
This is the only reason that a profit-seeking trader exists. If your goal is to succeed in this business, you must stop rationalizing and comparing and instead focus on return. You are in the absolute game, not the relative game.
