Recently, we had two positions in the Daily Battle Plan. One was ^EWT^. The other was ^QQQQ^. EWT lost money. QQQQ made money. Which one is more valuable over the long term?
If you said QQQQ, you’re thinking short term. Yes, the primary goal is to make money (otherwise why trade?). Shorter term we want every trade to make money. In reality though, there’s not a chance in the world that this will happen. Losses will occur and sometimes the losses will be potentially be large. But, if you view this longer term, the losses can be more valuable to you than the gains. Why? Because we learn more from the losses than we do from the gains.
I barely remember being in the QQQQ set-up except it was exited for a small gain on Friday in the Model Portfolio. Knowledge gained? Little to none. It was business as usual.
I do remember EWT though. And more importantly it reminded of me of the lessons I’ve learned from taking many tens of thousands of trades over two and a half decades. These are the two lessons I was reminded of from the trade.
The first lesson is I suspected the trade was going to lose when I started seeing some mainstream trading and financial websites mention EWT as “a wonderful pullback”. I don’t want to see mainstream websites agreeing with me. I want them to feel fear in seeing an ETF breaking down and thinking that Taiwan going to zero…. not it being a “wonderful pullback”. If you see retail sites agreeing with your positions, it’s not a good sign. I wish I could quantify this, but I can’t. I just know from experience that the odds shifted against the trade.
The second lesson I was reminded of is that no matter how oversold an ETF (or stock) becomes, it can become even more oversold.
When we scaled into EWT, the 2-period RSI was at levels that have historically produced correct trades over 90% of the time. This trade was a reminder that over 90% correct also means that 8-10% of the trades will not succeed. This is why we don’t go all-in on a trade, no matter how high the edges are. Yes, we leave something on the table by using traditional position sizing. But we also assure that no single position can do much harm to our portfolio. It assures we’re there to trade good quality set-ups over and over again in the future.
Winning trades are always nice. They help you accumulate wealth.
Losing trades are not fun but they are a part of trading. Most importantly, they provide you with greater wisdom than the winners. And this wisdom and insight that you gain, can be applied over and over again, especially as you trade for many years to come.
When you embrace your losing trades as much as your winning trades, you move up to the next level of mastery.
Special Note – Read the bestselling ETF trading book High Probability ETF Trading – recently Awarded Top 10 Trading & Investing Book of 2009 by SFO Magazine.
If you’d like to order your copy today, please click here now.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.