Trading To Win Or Not To Lose

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Trading To Win Or Not To Lose

Risk Management Or Profit Block

Risk management is an important aspect of binary options trading, the Catch 22 is too much management, or the wrong kind, can manage you out of your profits. Think about this. The stock is market is very risky and risk takers are rewarded with profits. The bigger the risk the bigger the profits. These profits, the lure of these profits, attracts millions of people to the investment world each year, and each year most of them barely make any money, and many of them lose their asses. Why? For those who chose to let others invest for them, laws in place limit the amount of risks that average people can take and by so doing, limit the amount of profits they can make. For those who chose to invest and trade for themselves poor money management, excessive risk or black swan events keep them from making profits or worse, wipes them out of the market.

This doesn’t mean that you should go out and take on the biggest risks you can, or that simply using a money management technique is enough, that would be dumb. My point is that there is a fine balance between risk management and handicapping your ability to make money, a balance between playing to win and playing not to lose. How does this apply to binary options? In a couple of ways and the first I want to bring up is the old Martingale strategy. We all know that Martingale can be a fun way to play at the casinos, it’s a fun little trick that helps us defray losses for a time in order to hopefully make that big win before the losses pile up and end our night out. What many fail to recognize is that when applied to binary options Martingale may keep you from losing, but it also prevents you from making profits.

  • Martingale is a betting technique that starts out at a set figure, X, and keeps all bets at that figure, X, until there is a loss. The next bet is then 2X so that a win will cover the loss on the first trade and produce a win of X. If that trade is a loser then the next trade is then 4X so that a win would cover the losses of X+2X and a profit of X. Each time a loss is incurred the next trade is then doubled to cover the loss of the previous trade and all others before it, and a win of 1X.

When you trade binary there is no big win, all wins are the same, or basically the same, whatever your brokers average payout is. By using the Martingale you can delay taking the loss on one trade, but you will never hit that big win. You may have a streak of wins, but that streak could just as easily become a string of losses that leads to a big trade, one big enough to wipe you out. If it does turn out to be a winner yes, you recover most of your losses but not all because binary doesn’t pay out at 100%. This means that any Martingale strategy you use, if it is to fulfill its true purpose, must increase each successive trade by MORE THAN 100% in order to cover the losses on the trade before it. This means a geometrically expanding figure that can go from $100 to $225 to $506 (assuming 80% payout) and on and on with your risk growing exponentially out of control in order to make a measly win of 80% the original trade, if you hit on a winner before you wipe yourself out of the market.

Clearly Martingale is not the best method here, it is playing not to lose. Savvy traders will suck up the original loss, focus on their win rate and use a more sound money/risk management technique that limits losses to an amount that will not hurt your account, even if you have a losing streak, and allows winners to win. I call it the Percent Rule but it is called many things by many people, basically it says that all trades are a PERCENT of your total balance. By using a percent instead of an amount the size of the trade will grow as the account grows so that your profits grow in tandem. Losses suck but what can you do, everybody makes losses some time, the percent rule prevents them from growing out of control. So long as your win rate is above the rate needed to be profitably you are in good shape, no single loss will prevent you from making the next trade and the net amount of wins will more than offset the losses. Basically, it will ensure long term success, profitability and trading. I personally use the 3% rule in my own accounts, all trades are always 3% of my account balance, some people go lower at 1% and some as high as 5%.

No matter your approach you need to take a step back and ask yourself the question, am I playing to win or playing not to lose? If your management helps limit losses and leaves profits free and clear then you are on the right track, if not you can always use the Percent Rule, it hasn’t failed me yet. In the end, it is far better to accept each loss as it comes and move on to the next trade rather than compound those losses with additional losses and allow emotions to cloud your judgement.

The Problem of “Trading Not to Lose” and Overcoming It

Trading not to lose is an issue almost every trader will face at some point in their trading career. Learn why trading with fear can cause a host of problems, then learn how to better handle that fear so you are making better trading decisions.

I was recently reading one of Doyle Brunson’s books–he’s a no limit hold ’em poker legend–where he talks about this issue in the poker world. In order to be a great poker player you need to be opportunity seeking, and not afraid to put your money at risk when there are opportunities to exploit your edge. Ultimately, great traders, athletes, poker players, or anyone at the top of their field, share one similar trait: they aren’t afraid to lose. They go after it, have a killer instinct, and want to take every opportunity they can to implement what they have practiced and studied.

Trading not to lose causes major problems for traders. Here’s what it is, why it’s problematic, and how to get yourself into an opportunity seeking mindset.

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Trading Not to Lose is Fear-Based Trading

As traders, we want to respect the market, but not fear it. It’s neither our ally nor our enemy; it’s a neutral sea of both potential and risk. Trading out of fear means we are too focused on the risk, and are unlikely to capitalize fully on the potential.

Trading not to lose, which is fear based, can cause the following symptoms (some or all) to develop:

  • You try to guess which of your trading signals are likely to be winners in an attempt to avoid the losing trades. By skipping signals you move away from your tested trading plan and strategies, and randomize your results. This is known as “trying to outwit” your trading plan.
  • Losses aren’t taken when the stop loss level is reached. The loss is allowed to run, resulting in bigger losses than planned. Fear is a tricky thing in that it can cause us to get more of the very thing we are trying to avoid. When we are afraid to take a loss–because we haven’t fully accepted that losses are a natural and regular occurrence in trading–we may actually try to avoid taking losses and thus run our accounts into the ground. This is an element of “loss aversion.” It’s important to understand, on a belief level, that losses are part of trading. They can’t be avoided, and trying to avoid them may actually cause more damage.
  • Trades are not allowed to develop. Contrary to the problem above, the trader is afraid of any sort of loss, or of a small winning trade turning into a loss. The trader knows the market gyrates back and forth, but they are “jittery” and therefore don’t allow their winning trades to compensate them for the risk they are taking. The trader continually gets out of trades at a small loss or profit even though their stop loss is in no danger of being hit at that moment, and the price hasn’t reached their target.
  • In general, fear can cloud judgment. In real-time, the trader may be so afraid to lose they don’t even see opportunities occurring. If you continually see trades (that you should have taken based on your trading plan) only in hindsight, fear may be causing you to actually filter out information and cloud your perception.

These are symptoms of trading not lose. Trading not to lose is a product of focusing on whether we win or whether we lose. But winning or losing actually shouldn’t be our focus.

As traders, it’s our job to come up with (or learn) strategies, develop a trading plan, and then rigorously test that plan for profitability and our ability to personally implement the plan.

Once we have a plan, our goal is to trade according to that proven plan. The plan is researched, backtested and/or traded in a demo account, and then traded live with small amounts of capital until the plan is proven successful. Wins and losses take care of themselves. While we are trading we can’t care about wins and losses…we only care about following our plan and trading every valid opportunity our trading plan gives us.

When we aren’t trading that is when we can look at our wins, losses, profitability, and trading stats to possibly make adjustments if needed to the plan. But this doesn’t occur during trading; while trading and holding positions our focus is only implementing our plan.

This is easier said than done, but understanding and accepting the following will help.

Believe in Probabilities

While winning is the ambition of traders, “not losing” actually ends up being the dominant factor that affects trader’s decisions. This is because it is very easy to have knowledge of risk, but it is something entirely different to believe you can overcome it. This requires an internal “belief” change, not just knowing that a change is required.

In an effort to not lose the aforementioned symptoms develop, resulting in the trader losing their capital. How can we change our mindset to help avert this?

Consider “the house” or casino in a game of blackjack. Each trade you make represents a hand of blackjack. There is the house (a buyer or seller), and there is the gambler (a buyer or seller on the other side of the trade). The difference between them is that the casino owner has a percentage edge over the gambler. Disciplined traders also have an edge, and can therefore be equated to the house or casino owner.

While playing blackjack have you ever seen a casino owner run downstairs to stop a hand of blackjack from occurring because he thinks he might lose on that hand? Never. Gambling regulations aside, casino owners actually want as many hands as possible to be played because they know they have an edge on each hand. Casino owners also know something else: each hand is independent of other hands. Anything can happen on a single hand! The casino owner knows we can’t predict which hand is going to make the house money and which is going to make the gambler money. All he knows is that each hand is independent–in that anything can happen on a particular hand–and that he has an edge over many hands.

Over a great many hands the casino holds a 3.5% to 4.5% advantage, varying based on house rules. While the casino may lose tons of hands, at the end of year they are likely to have made 3.5% to 4.5% on all the bets placed at their blackjack tables. The more bets placed, the more the edge is exploited, the more profit they make.

The bottom line is that traders need to adopt the “casino owner mindset,” realizing the result of each trade is unpredictable and therefore every valid trade, within the context of the trading plan, must be traded. Also, know that trades are independent of each other. While you may have a string of losses, that doesn’t mean there is something wrong. Allow your edge to play out over many trades. Trust your edge, as the casino does, that over the course of a week, month and year your edge will produce a profit. This assumes you have edge, which is why you need tested strategies.

No single trade matters to a pro trader. Whether it is a win or loss makes no difference. The only thing that matters is exploiting the edge and taking valid trades, because over the long run all those losses and wins will make the edge (profit) materialize. And the nice thing about trading is that traders can create a much larger edge than the casino has.

Reading or understanding this analogy won’t create any change in behavior, it needs to be incorporated into your belief structure for change to occur. Incorporate it into your belief structure by meditating on the concepts, write down notes and your thoughts related to it, so that it begins to seep into your brain, overtaking the current belief structures you have about the market which result in ‘trading not to lose’. Put notes beside your computer, and continually remind yourself to adopt the “casino owner mindset,” and all that it entails.

Final Word on Trading Not to Lose

Adopt the casino owner mindset. If you do so, you won’t care about whether you win or lose a trade. You will be more open to seeking opportunities. If your system is proven, over many trades you know you have an edge and profits will come. Take every valid signal you can, so your edge materializes. Think of it this way: if you know you can win 60% of the time by guessing heads on a coin flip you’d be trying to get as many people to bet you as possible. The same goes for trading. If you know you win about 60% (even 51% of the time, or 40% if you make more on your winners than you lose on your losers) of the time you should be taking every valid trade you can so you can exploit your probabilistic edge. If you try to figure out in advance which coin flips or trades will be winners and losers, you become the sucker.

For more on these topics, see the interview with Mark Douglas, trader and author of The Disciplined Trader and Trading in the Zone. His books are definitely worth the read, and that interview discusses some of the topics from those books.

If you want to improve your forex trading, check out my Forex Strategies Guide for Day and Swing Traders eBook.

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Trading to WIN Versus Trading NOT to Lose

What do you say to yourself when you are considering a trade? do you think of trading to win versus trading not to lose?

Most traders would naturally focus on NOT losing, because that’s what they are trying to avoid. By focusing and concentrating on not losing you are actually engaging more so in a losers mindset. It is better to set up a positive self fulfilling prophecy. So if you are constantly recognising self-talk which engages in conversations like “what if I lose money” or “what if I have a bad day”, you should pay attention to that internal conversation and try to think more positively saying things such as “how can I have a good day” or ” how can I make the most out of the trade and its opportunity”.

I have broken down the characteristics of traders that are trading to win as well as traders which are trading not to lose. A trader needs to consider at all times before and during a trade whether they are thinking in a way that is more engaged in “Trading to Win” or “Trading Not to Lose”. Concentrating on not losing is usually what leads to losing and concentrating on winning is what usually leads to winning. Trading is a business that requires taking Risks and Embracing them, focusing too much on not losing disables a traders ability to take Risk and Accept it. To be successful in trading you must be willing to take Risks, but at the same time know and manage your risk at all times from the perspective of your GoalObjective and not because you don’t want to realise that cost.

The Characteristics of a trader who is “TRADING NOT TO LOSE”:
•RISK AVERSE.
•Focus is on NOT losing (which leads to struggle with gaining!).
•Using tight stops to prevent bigger losses, mainly out of Fear of losing.
•Trailing stops too aggressively in order NOT to lose.
•Snatching at profits, the fear of a certain profit becoming a loss or no profit.
•Holding onto losers, with the inability to accept a loss, even after the reason for being in the trade is over.
•Is Fear driven rather than driven by their Vision or Objective.
•Is driven by past experiences, which cloud the present moment and what is REALLY happening.
•Looking for certainty.
•Looking to satisfy the Ego rather than the business.
•Trading to satisfy the P&L.
•Lacks patience to wait for the right trade, and trades to satisfy the need to trade rather than to win with the objective in mind.
•Lacks patience for winners to play out or offside trades to work out, for the fear of losing or giving back gains.

The Characteristics of a trader who is “TRADING TO WIN”:
•EMBRACES RISKS
•Focus is on Winning.
•They have a clearly defined GOALOBJECTIVE.
•Trades in the GAP between where they are now and where they want to be.
•Trades in the Moment.
•Committed to the VISION of achieving a goal.
•Will embrace uncertainty.
•Will embrace market noise, as long as the reason for being in a trade is still valid.
•Will have belief and confidence in what he is doing.
•Will have Patience for the market to play it self-out and wait for the right opportunity to set-up.
•Will have the patience,belief and confidence for a trade to reach its targets and manage the trade accordingly.
•Trades to trade well!

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