There are so many maxims by which you could choose to invest and trade but the one that is most closely aligned to trading is “it’s not whether you win or lose but how you play the game”.
Indeed this is something that all novice investors and traders should have to write all over their plans as most of them enter into the world of trading with the pre-conceived idea that winning is all that matters.
The truth is that to make long-term gains, the most essential elements are planning and discipline. Obviously, it is possible to get some quick wins, to cash in on a whim but these methods will not work in the long-term.
Justified VS Unjustified Wins
In order to clarify the point, it is essential to make a distinction between justified versus unjustified wins.
Justified Wins
So when is a win justified as opposed to unjustified?
Well if an investor or trader enters into a trade with a detailed plan that identifies all the key elements of exit points, risk management and then follows that plan, any profit is fully justified.
The investor/trader has executed their trade correctly and gained the benefit of doing so with a profit. Such a gain reinforces the idea of using and sticking to a plan.
Unjustified Wins
On the flip-side, an unjustified profit is one that occurred by chance. The investor/trader either didn’t make a plan or didn’t follow it, but they still made a profit.
The unjustified profit is not good for the long term as it only gives the investor/trader the idea that they can get away with not following a plan. An example of how it might occur is when a trade starts out in a perfectly structured fashion with a plan, but the plan doesn’t work through as expected as the markets don’t move as much as anticipated or go in the wrong direction. At this point the plan and good practice would dictate to close out the trade and move on.
However if the investor/trader holds on and the markets later shifts so they are able to profit take, it gives the idea that not following the plan is not a bad thing after all.
The Real Cost of Unjustified Wins for Future Investments and Trades
The argument would be from the investor/trader “all is well that ends well” and that would be right in pure numerical terms, though one could in fact further argue that the lost opportunity cost in the meantime even negates that.
More importantly, is the psychological cost that unjustified wins bring into the investor/trader’s future approach to trading. It strips away the need for the discipline to follow a plan which in the long run will only end up bringing with it greater losses than the initial gain.
If successful trading is all about the long-term and the ability to consistently produce profits then it is essential to have a method for doing that. The method is planning to win and the execution of the plans in a consistent and disciplined fashion to gain from the law of averages. It is always about the percentages of the whole portfolio at the end of the day and not about any individual gain or loss.
Even executing a strategy that should deliver an 80% success rate will in reality deliver less than that due to the sheer nature of the markets and the fact that the past is not a true prediction of future performance. If an investor/trader consistently goes off the plan then they will degrade their anticipated rates of return even further as the odds start going against them.
Takeaway Points
Plan to win both with each individual trade as well as in terms of the long-term strategy.
Follow the plan in a consistent and disciplined fashion and the rewards will become evident, which in turn will reinforce the understanding of the need for a structured approach.
The unjustified wins might deliver an occasional success and the feeling that somehow you have beaten the system, but there is a high price to be paid if you can’t acknowledge that justified wins are the ones you should be seeking.
Terry
