Looking back, the ability to accept being wrong on any given trade took a surprisingly long time to master.
When I create a habit out of something, it is hard for me to break.
That goes for both good and bad habits, probably like most people.
In trading, I had no shortage of bad habits. I don’t regret them. Those early days are what ultimately helped shape the trader I have become and decided to be today.
I am still a believer that you could learn, early on, to minimize the constant repeat of what we’d agree are bad habits; quite possibly avoid most of them altogether.
I believe you can learn to develop the proper mindset and perspective while building a trading business that is completely adapted to your lifestyle.
That’s why I decided to create DIYtrades in the first place. Maybe other traders could learn from my perspective or the way that I trade.
That of course depends on your willpower, ability to listen and follow guidance, and ultimately what you are after.
If you already have self-control, discipline, and an open mind to take that guidance and criticism when it comes to your trading, you will certainly benefit from someone who is sincerely helping you become a better trader, no doubt about it.
I’m fully aware that there are traders who make large sums of money consistently, over seven figures annually.
If that is what I wanted to work towards achieving, I would no doubt do everything I can to try and work alongside one of them. Learn how they trade, how they size into trades, etc.
However, I know the trader I want to be.
What matters more to me is consistency over time.
The ability to provide for my family while maximizing my time in life to do and learn all sorts of other things.
I say all that to explain that my purpose matters every day when it comes to me accepting that I am in the middle of a wrong decision.
I know what I am ultimately after, and the last thing is expecting the market to agree with me, or me becoming blinded by the need to be right because “I want to make money.”
Early on when I started trading those thoughts would get into my head at the worst possible times.
It seems impossible to not succumb to that sort of bias, especially if you have never faced it.
It’s called confirmation bias.
There is plenty of research in psychology supporting the fact that confirmation bias affects how we gather information as well as process information.
There is no way you would let yourself be down $300 on a trade you were anticipating a move that would net you $200 profit. That’s a bad risk/reward because you stay in the trade that long. (Typically 2:1, 3:1, or higher is a good risk/reward).
- You think you would cut the trade if at $100 down, but you give it some room.
- Then $150 comes, and you still believe that it’s just a little bit more.
- By $200 you refuse to accept the loss. (Confirmation bias takeover)
- You add to the position and the losses grow to $400…$600 or worse. You keep adding…eventually that day (hopefully)…maybe even the next or days later…you bail.
- Again just an example, but perhaps you’ve already experienced it.
Say you never add when you are down, you’ve got that skill down solid, but you still don’t want to lose or be wrong.
So you hold your small position and your day trades become swing trades, and you just never get out. Not only is your energy consumed but so is your buying power.
I have been guilty of both scenarios with more zeroes behind it.
I know what it is like to lose a lot of money (the average individual’s annual salary) in a few minutes, and that same amount in a trade I could not let go of over the course of a week or more.
If it sounds crazy to hear that, trust me it seems crazy today to think that I could have let that happen at one time. It really doesn’t make rational sense.
But that’s the point.
When we become convicted we are blinded.
The obvious is no longer obvious.
We only see what we want to happen, not what is.
It’s only when the damage is done and we look back, whether it’s our P&L or the actual chart, and we see it.
You might say, “That is where I should’ve gotten out at,” or “I should not have added there.”
Yes, we all know the burden of hindsight. It’s inevitable.
So let’s bring this home.
Accepting you are wrong must go beyond trading. It has to be part of your identity.
Do you argue with a friend or spouse on a particular viewpoint because you are convicted that you know the topic, and they are wrong, and you are right?
If not then that is good. If so then honestly, you’ve got to develop a mindset of “not caring if you are wrong.”
I don’t mean to become flippant about what you say and do.
I mean genuinely if you were to answer a question on any topic and the person asking knew the answer, but you got it wrong, you’ve got to be ok with being told you are wrong.
Care more about learning what the answer is than being upset about not knowing it in the first place.
Sometimes I may express what I believe is the right answer, oftentimes my opinion about a particular thing. Doesn’t matter what it is about; nutrition, history, politics, whatever. I’m ok with saying something that isn’t right by mistake.
I don’t go barking off at the mouth when I know I am wrong. That is not what I am talking about.
I am talking about actually being wrong about something you thought was right.
Even taking a guess at something before it happens and not getting it right. I do that all the time, and I am totally ok if someone turns to me and says, “nope you got it wrong.”
I didn’t really care, the odds were 50/50. Sometimes the odds are in my favor though because I know something about what is going on.
Maybe they become 55/45 in my favor and so I’ll take those odds, and turns out I could still be wrong, and it is still ok.
So being ok with being wrong isn’t a characteristic, or hat you wear when you get ready to trade for the day, it has to be something that you can carry in all areas of your life.
That is how it will come easier in trading.
The other part is what I said before about why you are trading, what your long term vision is, your purpose.
What drives you and who relies on your success?
When you really internalize that, you will know that accepting the fact that you mistimed your entry, or you took too much size so you should size down (when you get that little inner feeling in your gut, like being concerned that you could be wrong and if you are you don’t need this much size to tell you.)
You will realize that you should never take on the risk of taking a full position as your initial entry, that you should stop out when you say you would because you can always get back into the trade or another trade.
And there are a lot more days of trading going forward, today does not have to be the day you hit the grand slam or homerun.
But maybe after all that you are still not confident you can accept being wrong.
I’ll make it super simple.
Trade as if you are always wrong.
No, I do not mean trade scared, never take a trade, or just sit there and do nothing. That is taking it to the extreme.
As an example, if you think you are about to short a stock and it has more room to go, but you want to start in, take 1/10th size, if your full size is 200 shares, take 10 or 20 shares. If it’s a large-cap stock with an average true range (ATR) of $15 and you shorted on a day it’s up $25, but it goes $26, 27, 28, you are down $20…$40…$60 you can cut it at that point. A different story had you jumped in 200 shares and then held even for $.50 which is not enough room for that type of range anyway.
So if you go in thinking “I’m early, it’s got more room, probably wrong,” but you want to start, take that small amount of shares.
I do this all the time.
It’s not FOMO, it’s anticipation. I want to anticipate the reversal, at the same time I do want to be in the trade, but I can accomplish both with a measly 5 shares. It is not about making money immediately on that initial entry. It is about getting a feel for the trade.
You can only do that if you are ok with being wrong on the trade, you do not add to a losing position, and are able to wait for the trade to come to you.
But if today is not the day and it doesn’t, then you can cut the small position, and move on, keep watching the next day and the next.
Eventually, the stock will reverse to find more buyers because there will be a point where there aren’t very many, and profits are going to be taken.
Being wrong is part of trading. It’s all about probability.
There is no way you can be right all the time.
Accepting that fact is what will drive your ability to cut losses, to avoid a particular trade, to stay small until other factors confirm your thesis and then add to the position.
Accepting the fact that you are going to be wrong is powerful on its own, but it fundamentally drives a lot of your decisions, with the ultimate goal of minimizing risk and losses when you are in fact in a wrong trade.
That’s what the whole key is to this acceptance.
It allows you to control the loss, minimize them as much as possible, and focus on the trades that will be the right ones.
That’s how consistency is formed and maintained after all. More winning trades than losing ones.
When you combine that with smaller losses and larger gains, then you can have more losing trades and still come out ahead.
If you have huge losses that wipe out a week, a month, or more then you will always be taking two steps forward and three steps back. And when you convert that into your trading performance, you will be losing money or at best breaking even.
Don’t be afraid of being wrong. It’s part of the game.