To win big you need to learn how to lose
Charlie Aitken (Aim Funds): ‘the difference between my life as a stockbroker and my new life as a fund manager is that now I limit my losses to 10%. As a stockbroker I (we) are not great at issuing sells.
Now when a stock is at a loss I cut it and move on. We work our capital hard and that means cutting the non-performers and move on to new opportunities.’
And here’s why……..
As Mr. Aitken shows what’s the chance that your losers will suddenly rebound and give you the sort of chart busting returns that will recoup your losses? Almost zilch. But that doesn’t seem to stop us trying. In the meantime you are losing the chance to earn at least savings bank returns on your money. And you are losing out on money you could make by reinvesting in better avenues. It’s painful to lose money but more painful to stick with the losers. In this game we must learn from our mistakes and grow to succeed. There is a clear path to success if we choose to take it.
Stockradar doesn’t drive in the same lane as most but rather looks at stock movement as a way to make money when based on two key elements devoid of noise which is a distraction. 1. The use of high probability ‘behavioural’ techniques, and 2. Manage risk vigilantly.
Our approach is bereft of fundamental analysis or any other influences but rather single-minded respect for the cold hard forces of price (human) behaviour. The approach is one of behavioural analysis wrapped up in a safety net of money management.
Firstly we don’t trade fundamentals, we trade price so that’s where we want to start. Price action gives us ‘trigger’ points and physical boundaries for us visualise, analyse, and trade.
Why behavioural analysis?
We analyse price because it is the ‘value’ assessment of a culmination of investor perceptions of fundamentals, responses to any news items, and the natural human behaviour effect that is called sentiment. Price action reflects human behaviour, which is much more that just the fundamentals. Fundamental analysis is not a trading technique in itself but rather a background of information about a stock.
Why Money management?
Well, as our esteemed stock picker Charlie Aitken observes above, as a fund manager all of a sudden accountability and money management become a key component to trading success.
There are two key reasons for this.
- Firstly you can control risk objectively and maximize opportunities. Why do we need this control? Because we can often be wrong which is a big affront to our egos and losses can quickly mount also we often sell too early when a stock is trending higher. Sentiment often takes prices far beyond our expectations. e.g, Qantas, A2M. And there are many more on that list.
- Secondly it frees your mind from the emotional baggage of carrying losses. This has a direct behavioural effect on our actions. Clearing the dead-weight of losses has a liberating effect allowing us to move forward with confidence. Taking a loss and accepting that it is also the ‘right thing’ to do makes us feel better about ourselves and boosts our confidence.
They are a key component of our risk and profit management strategy. It is a call to action. They’re always preset so we know what to do under any market circumstance. Often these decisions are more easily and sensibly better made on a controlled predetermined basis than ‘on the run’.
Why do we need to manage expectations?
Again the forces of reality (losses are a part of any good trading process) require necessary acceptance. As humans when dealing with money we are always optimists. It is easy to get carried away with the profit potential and how you are going to spend it. Rein back the expectations and be realistic about understanding the ‘ups (profit) and downs (loss)’ path to generating steady returns. This awareness helps maintain a steadier emotional balance and prevents disappointment. The better we trade the better we understand the necessity of maintaining the same controlled emotional balance when executing any trade.