Why being an ‘all-in’ type trader is a failure to face reality?
Perhaps one or two trades do go your way. Heck, hopefully, you will then manage to string together a half dozen good wins. You trade from your gut and is fearless when it comes to adding onto a losing position. Your instinct has gotten you this far, so why not remain trusting in your gut to guide you to further financial success?
While we certainly applaud your success, I have to break some harsh news to you. The answer to the above question is because adding to a losing position is simply a failure.
Failure to Recognize that Trading is a Risk Management Profession
The first flaw shown in trading is that it misses one of the fundamental principles of long-term trading success. I have written extensively on the importance of risk management and the necessity to have a strong, well thought out plan. When you trade all-in, you essentially throwing the entire art of risk management out of the window.
Without a risk management plan, you can become castaway, swimming in the ocean without a lifejacket, completely at the mercy of the currents and hungry sharks. Sure, you may drift to an island or have a passing boat but from becoming tiresome, there is a far greater chance of not making it to shore.
The market is the same as the ocean – unpredictable. As much as you think you know, the market can still take a turn just like the currents. If you’re absolutely sure a price will rebound because you’ve seen it before and you feel it going that way – a heads up – there is no guarantee of any outcome.
Failure to Recognize Trading’s Uncertainties
To continue from the previous section, the market’s movements are defined by uncertainty. Sure, it helps to study historical charts so that you understand previous movements and have some idea of possible future moves. However, at the end of the day, you cannot be assured about any occurrence.
If you go all-in because you’re certain a price will rebound, please think again. It may do that, but not because it has to. Accepting the market’s uncertainties is one of the first steps to guarding yourself against windfall losses.
Failure to Face your Own Trading Demons
Here at The 5%ers, we often discuss trading mentalities. We stress the importance of mentally mapping out and taking stock of your emotions and fears.
If you are an all-in trader, it’s important to ask yourself why you engage in this type of trading. Is it because you have a fear of missing out or losing? Is there another emotional driver that compels you to add onto losing positions?
Whatever it is, you should take a step back and be honest with yourself. Flush it out your system. Write down your true motivations for engaging in all-in. After that, you can move on to finding a remedy.
Adding to a Losing Trade can be Addictive
To further expand on mental aspects of all-in trading, this behavior can be highly addicting when certain personalities engage in it.
In the short-term, you’ll see more trades that you manage to recover. This can give you a rush and a sense of invincibility that you have a magic touch which can turn the impossible around.
However, it only takes one chance to be unable to turn it around and then you ruin your account. One failure to swing back trades from the abyss will result in many weeks or months of dedicated hours and hard-earned capital to vanish into thin air.
In the short term, don’t be tempted because the payout day will eventually get you.
While trading all-in puts you in immediate and serious danger, there are several ways to get yourself away from this type of trading.
- Develop an ability to love your losses. We don’t say you should settle for losses, but rather understand that losses are an inherent part of trading and that a trader’s success is determined over the long run, not in the short.
- Master your new strategy (not your old all-in strategy)! Train your mind to take losses when needed. Not all losses are bad when they are strategic and part of a broader, long term strategy.
- Fully accept that the market is an unpredictable environment.
- Plan and master a solid money management strategy to protect yourself from catastrophic portfolio loss.
- Leave your ego at the door when you enter your trading office.
Having all of something can be implied as being powerful and having the ability to do anything. But, over here, it is too much and less is ultimately more. Traders should and must, face the realities of the market. It is your job as a trader!