Low Risk Entries = A Good Night's Sleep

By David Hobart
16 February 2009

Dealing with uncertainty is central to the trading process. Uncertainty exists when trying to predict the future. Often when trading we become attached to our predictions, which cause us to emotionally react to our trading outcomes. We ride the rollercoaster and are generally left exhausted and unfulfilled.

Trading successfully is less about predicting the future and more about simply harvesting profits in the moment, without getting caught in the need for being right.

No matter how smart you think you are, the future remains uncertain. As soon as you think you know with certainty what the future holds, you are living in a world detached from reality. For reality exists only in this moment. The future is an unfolding creative expression of infinite ideas and possibilities.

Trading is not about being right; it’s about making money

Many traders fall into the trap of thinking that they need to be right more often than they are wrong. If you are wrong more than half of the time, then why do you bother? The market can only go up or down; surely you have to do better than 50%? Being wrong often attacks your sense of worth and invalidates your efforts.

The truth is that we don’t know the future. So why do we beat ourselves up for not predicting it correctly? The good news is that we don’t need to know the future, and the even better news is, that we don’t need to be right even half the time.

I’m right 35% of the time

In my trading process, I am right about 35% of the time on average. Obviously this means that 65% of the time I am wrong. Despite this, I have delivered for my investors over the past 3 years an average annual net return of over 20% and 35% (for different unit classes in the Fund that I manage – www.apeiron.com.au ).

So how do I manage taking so many consistent hits (losses) and yet keep on delivering positive returns? The first thing is changing the context around losses. Losses in trading are the business equivalent of cost of good sold. I need to take them in order to make money, but the trick is keeping them small and manageable.

The second thing is about letting my profits run. My average win sits at about 3.5 times my average loss. This of course means that I can take a string of losses without becoming too concerned, because I know that a couple of wins will balance the ledger.

Low risk entries

Low risk does not mean low risk of losing money. In fact, the chance of me losing money on an entry is on average 65%. So why take the bet? Because the amount of capital I am risking is small relative to the potential payoff.

By expressing my ideas on the markets using low risk trading opportunities, I need not become attached to any individual trade outcome. This keeps me focused on my process and not my bank account, and ensures I sleep soundly, regardless of what is happening in the markets.

If you would like to find out more about David Hobart’s trading coaching and mentoring programs, please email David at dhobart@traderemotions.com.au  .
 

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Disclaimer: The contents of www.traderemotions.com.au is general information only and in no way provides advice in a personal or general nature. David Hobart and his related entities can not be held responsible for any loss, cost or expense resulting from your activities related to the subject matter in this document and or relating to www.traderemotions.com.au

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