September 14, 2014

Fear of losing profits

No matter how much analysis you do, the probability of any trade failing or succeeding (over a 1000+ trades) is on an average 50%.

Position sizing will take care of the risk.

Once you understand this, it does not matter what system you follow or how much analysis you do.

Too much get time gets wasted in designing a "perfect" system or trying to improve a system which is anyway fine.

You can simply buy a stock if it closes above last month's high etc. This is an example of a simple strategy which generate fantastic returns when the trend is in your favour. This incidentally is my favourite.

Any money you make from this point onwards will be because of your ability to (a) cut losses fast and (b) hold on to winning positions as long as possible.

In reality the above is difficult for most people to implement and so what people do is the opposite... hold to loss making positions for weeks and months and exit profitable positions as fast as possible. This is a recipe for disaster and it will make sense for people to focus on this behavioral aspect and make this an improvement area (instead of improving a system). Because unless people change this, it will be impossible for them to make money in the markets irrespective of which system or stock market guru you follow.

There is another angle to this... it is your own money involved. If you were working in a corporate entity and a very strict trading rule required you to exit if SL was hit or lose your job, you will automatically follow the SL. It is not your money involved but if it is your own money, you will happily postpone the pain of losing money and will look for additional confirmations, ask people and so on. For the same reason, you will automatically "book" profits soon because the fear of losing profits is more than the pain of booking a loss.

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