The Art Of Being Wrong And Winning
There is a great paradox in trading. Traders want to win. But to win, you have to learn how to lose. Learning how to lose is actually more important than winning. This is counterintuitive and often the greatest stumbling block traders face.
Imagine being given a recipe that has produced hundreds of millions of dollars in profit. Do you think you could trade it?
One of the greatest commodity traders of all time is Richard Dennis and his partner, William Eckhardt. They had an ongoing debate whether great traders could be taught, or whether trading instincts were innate talents that some people were born with.
Dennis began trading commodity futures with $400 and turned it into over $200 million. To settle their debate, Dennis and Eckhardt took out the following advertisement in September 1984 seeking to hire new traders whom they would train:
This advertisement has become the most legendary want ad ever created in the trading community.
Long story made short, Dennis and Eckhardt hired a group of 24 traders and supplied them with two weeks of training. The students were called “the Turtles” and over the next 4 years they earned an aggregate sum of over $100 million. Their system was leaked by one of the students and published as a bestselling book.
Even though the Turtle trading book has become a best seller, most traders would not be able to trade the system Mr. Dennis developed. I say that because the system requires that a trader learn to follow simple rules and sit on their hands most of the time. When people go back and study Mr. Dennis’ successes in the markets they notice something that is quite amazing. He only won around 15% of his trades!
This means that he lost on 85% of his trades!
Do you think you could handle that level of consistency in being wrong?
But let’s look at the math to understand what is truly important.
Let’s say you have 100 trades.
On the 85 trades that you lose you end up losing $400 per trade.
This equates to a ($34,000 loss.)
But on the 15 trades you win you make $4000 per trade.
This equates to a $60,000 win.
So your NET after 100 trades is +$26,000.
Stated another way the expectancy in this example is that it will earn $260 per trade.
This, in spite of it only winning 15% of the time.
Expectancy is defined as net profit or loss divided by total number of trades.
Do you know what your expectancy is when you trade?
Mr. Dennis’s proteges have gone on to become very successful hedge fund managers and commodity pool operators and currently manage billions of dollars.
That is how important the metric of expectancy is.
Great trading is never about how much you make when you are right, but rather how little you lose when you are wrong.
Want to become a great trader? Along with using VantagePoint, learn how EXPECTANCY can be your most important trading metric.
Manage your risk on each and every trade or it will manage you.
Make it count!