I know that there are many investors (including professional traders) who are less willing to cut losses at -2% than taking profit at +2%, but is it the only reason?
Why do traders lose more money on their losing trades than they make on their winning trades?
- Thread starter Lloyd W. Coutee
- Start date
Psychology and one trader will have a different reason (the mind) why their losses tend to be larger than their winners.
Someone posted here once at Elitetrader.com a psychological diagram of how we think as a person when in a losing situation versus how we think as a person when in a winning situation. The mind really reacts differently and the longer someone is not a profitable trader...it becomes more difficult to change or stop that cycle of behavior (reaction) to a losing situation versus a winning situation.
In fact, there's been studies in the past 10 years that specifically show that women and men react differently in losing situations and react differently in winning situations.
Someone posted here once at Elitetrader.com a psychological diagram of how we think as a person when in a losing situation versus how we think as a person when in a winning situation. The mind really reacts differently and the longer someone is not a profitable trader...it becomes more difficult to change or stop that cycle of behavior (reaction) to a losing situation versus a winning situation.
In fact, there's been studies in the past 10 years that specifically show that women and men react differently in losing situations and react differently in winning situations.
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I have been going through that losing thing for the last 8 months, and having a horrible time shaking it. Done lots of studying, pull back on $ amount traded etc. Any tips on how to shake it, please share.
The crazy thing about it, for the first 2+ years, I could do very little wrong. It was like magic.
Honestly, I have no problem if my losing trade is much larger than my winning trade, this all boil down to the risk/reward vs win/loss ratio.
I am completely OK if a system allow me to make $1 or loss $6 in each trade, IF my winning ratio = 95%
I am completely OK if a system allow me to make $1 or loss $6 in each trade, IF my winning ratio = 95%
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Your exposure should be zero when you don't know what you're doing.
And when you find something that works very well, you should be pressing it as hard as you can.
In between is where you don't want to be.
Grinding away on smaller sizes doesn't seem to be going anywhere, especially if you keep losing.
For small traders looking to bootstrap, you either have something which works at very high leverage (very accurate) or you don't really have anything worthwhile.
Time is the most valuable asset you have.
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Honestly, I have no problem if my losing trade is much larger than my winning trade, this all boil down to the risk/reward vs win/loss ratio. I am completely OK if a system allow me to make $1 or loss $6 in each trade, IF my winning ratio = 95%
In theory you are right, expectancy is enough...
But the future is different from the past. If you have two systems with the same positive expectancy, I would argue the system with the smaller average loser is superior because it is more robust to small changes in the future win rate.
Suppose the future win rate drops by 10%. How does this affect results? Moving from 5% losers to 15% losers when the average loser is very large will make a big difference to the bottom line. You are getting a threefold increase in a big negative number. In contrast, the impact of moving from say 30% losers to 40% losers when the average loser is very small will not be so dramatic on the overall performance.
Here is simple example to illustrate what I mean. You have two systems, A and B, and suppose both experience a 10% drop in the win rate.
Initial state - systems A and B have same expectancy:
System A: 95% win rate, avg winner +30, avg loser -270 -> avg profit 15
System B: 70% win rate, avg winner +30, avg loser -20 -> avg profit 15
Final state - after a 10% drop in win rate:
System A: 85% win rate, avg winner +30, avg loser -270 -> avg loss 15
System B: 60% win rate, avg winner +30, avg loser -20 -> avg profit 10
So in this simple example, System B, with the small average loser, is still a winning system despite a 10% drop in the win rate. But System A is now a losing system. If the win rate dropped even further, say another 10%, the effect on System A would be more dramatic (avg loss 45). Whereas System B would still be profitable with a 50% win rate (avg profit 5).
Why do traders lose more money on their losing trades than they make on their winning trades?"
There should be no logical reason to, except for inferior trading skills or management
There should be no logical reason to, except for inferior trading skills or management
You're in good company. Tough year for hedge funds and most managers.
We've been in a grinding, sideways market with a couple of sharp sell offs. Lot easier to make money in a nice uptrend.