It does not matter how many times we say it, but people just don’t get this…
If you can understand what I will share with you today, it will put you ahead of everybody else… ahead of 95% of people out there.
Robert Kiyosaki, the author of Rich Dad Poor Dad, once said this:
“Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success.”
In other words, if you want to win, you MUST be prepared to make mistakes.
For example, do you think Microsoft would ever have made any money if they wanted their Windows PC program to be perfect? In fact, has Windows every been perfect?
No, definitely not. Microsoft makes mistakes all the time! They correct their mistakes, and then they give you the “new” product and charge you for it!
And yet, despite all the errors Microsoft has made, its owner Bill Gates is one of the richest men in the world… Think about that.
But how is it possible to be wrong more than you’re right, and still make money?
Consider this for a moment:
Let’s say you have a trading system that has a win ratio of 30%…
This simply means that you’ll be wrong 7 out of 10 times, and be right only 3 out of 10 times.
That may sound like terrible odds. Most people are convinced that they could not possibly make money with odds like that.
But they would be wrong.
Let’s say that every time you are wrong, you lose only $100. And every time you win, you make $1,000…
Let’s do the maths:
7 x $100 = $700 loss
3 x $1,000 = $3,000 gain
Net profit = $3,000 (gain) minus $700 (loss) = $2,300 profit
In fact, even if your losses were twice as much, let’s say $200 every time you were wrong, you would still be in net profit after 7 losses:
Net profit = $3,000 (gain) minus $1400 (loss) = $1,600 profit
That is why one of the best traders in the world, Paul Tudor Jones, once said that 80% of your profits will come from 20% of your trades!
Of course, the 30% win ratio that I mentioned was just an example of a “worst case scenario”. In reality, we would not use a system with such low odds. We would be using a trading system with a more than 50% win ratio.
But I just wanted to let you understand that the whole idea of a “win ratio” is not as important as you may think.
The real key to winning and success is consistency, sticking to rules, limiting your risk, keeping losses small and letting profits run.
Now I can guarantee you that 95% of people who take up trading do not know this… and they refuse to understand it.
Most people usually give up after 5 losing trades. They go in search of the next best thing… the next “holy grail”.
And years later, if they are smart, they finally realise that there is no such thing as a holy grail in trading, and accept the fact that you must have losses in order to win.
If you want to see the rainbow, you need to put up with the rain.
The problem is that we humans our primarily emotional beings. Sadly, emotions speak more to us than logic.
The pain of losing is therefore more powerful than any logic or sense in the world.
Professional traders think differently.
One of my best trader friends once told me: “When I have a few losing trades, I get excited. Because I know a winning trade is near, and I’ll make back all my losses for the week and be in big profit again”.
I would totally agree. It takes only one superior trade to make back any previous losses and to go back in to profit again.
In a future essay, I’ll tell you about my favourite trading strategy, and why it will stand the test of time. In fact, I am confident that this method will still work 20 or 30 years from now.
Alessio Rastani is a stock market trader at www.leadingtrader.com