In trading, entering a position means that you’re confident enough in your idea to bet money on it.
You manage your risks by studying the current economic themes, plotting key chart levels, and preparing for different price reactions.
This is a good thing.
Being confident in your idea will help your execution. It will help you pull the trigger even when you’re on a losing streak, press trades when needed, and stick to your plans even when you’re tempted to cut corners.
The problem starts when you become too confident in your opinions.
What if, despite your research and experience, you were wrong?
Why it’s okay to be wrong
A good reason why you should get used to being wrong is that you will be. OFTEN.
Even the most consistently profitable traders have found themselves on the wrong side of trades. In fact, some traders can have low win rates and still be profitable in the long run.
This doesn’t mean that they were bad analysts or traders.
It just means that price had reacted differently than they had projected when they entered the trade. Maybe a new catalyst came along, a report printed unexpected numbers, or maybe a world leader tweeted something explosive.
If you’re not open to being wrong, then also you’re not preparing for a key and inevitable component of trading.
The sooner you accept that your idea is invalidated, the sooner you can channel your energy into minimizing your losses or even flipping your biases.
An important thing to remember is that you shouldn’t take these losses personally. Don’t beat yourself up too hard about being on the wrong side of a trade!
Last but not least, being wrong and losing trades can teach you lessons you won’t get from winning trades.
Losing trades, for example, can tell you which assets and strategies to avoid, when you’re risking too much, or what mindset you need to be in to trade profitably. Tracking key trading metrics and using a psychological journal will help you with this.
So, how can you be confident AND open to being wrong?
The key is to recognize that it’s your trading skills – not your trade ideas – that will make or break your account.
If you’re confident that you can manage your risks no matter how price behaves, then you’ll be more open to (and even welcome) being wrong.
If you’re not used to being wrong yet, then you can start by keeping up to date with the market themes and looking out for catalysts that could turn price against your position. Normalize reading opposing headlines and biases as they can help you minimize your losses.
You can also try setting parameters for invalidation before you enter a trade. You can ask questions like:
- How long do I expect the price to hit my targets? What will I do if the price hasn’t reached those levels by then?
- What if the shorter/longer time frames start pointing in the other direction?
- At what price level should I start re-evaluating my biases?
At the end of the day, a trader’s job is not to be right, but to be profitable.
Managing your risks means choosing the best possible odds for your positions, even it means recognizing that your initial trade idea was wrong or invalidated.
Always keep in mind that you’re striving for progress, not perfection.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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