Trading is one of those industries with tons of sporting analogies. Perhaps it’s because elite trading is a lot like playing sports at an elite level. One of my favourite analogies I resonate with a lot, is the cricket analogy.
Trading is like batting in Cricket test match. The game goes on for a while, and your job is to stay on the crease for as long as possible during the game. While ticking the score board.
He wants to be around when the loose balls come at him. For him to really take advantage to move the needle again. His job is to identify when such balls come, and act accordingly. What he can’t do is treat every ball like a lousy ball, trying to knock everything out of the park. He’d rather get 0 runs than to risk being bowled, run out, LWBd or caught.
His edge lies in his surviving the tough balls, and being around the loose balls. He knows that each ball he faces is unique from any other balls he has faced before. When he recognizes what he deems as a loose ball. He must also remember that though, this ball looks like some balls he’s faced before. It’s not. He doesn’t know if the way he normally deals with “loose” balls will yield the same results this time. He can still be out. In some games there will be that 1 or 2 bowlers who’re having a tough day. They will give you loose balls in quick succession.
Similarly if you can survive the clusters of losing trades. You can take advantage when good opportunities come around. The sequence of good and loose balls is random. Just as the sequence of winning and losing trades is random. Therefore you can’t trade like you know the outcome of any trade you take in advance
Cutting your losses short is the equivalent of blocking the good balls. They will be offset by the singles(small winners) you take from time to time. Big losses will not only damage the kitty. They also hurt your mental capital. You can’t afford to be too debilitated to trade when the good opportunities come. Because you thought you could knock every ball out the park.
Unfortunately for bats-man it’s one strikeout. For us as traders you get multiple strikes. For as long as we’re sufficiently capitalised.
Taking big losses is like a bowler being knocked for 6s and 4s nobody wants that.
Keep bets small and execute on your stops