H + W + P = E
(Hoping + Wishing + Praying = Exit The Trade!)
Any time you find yourself in an investment or trade and catch yourself doing one or all of the following:
* Hoping it gets back to the price where you bought it.
* Wishing you had waited longer to get into it.
* Praying that some market event occurs to increase the value of your position.
Then you know you have become emotional about your investment or trade and you need to start to Exit The Position!
Remember, trading is a game of probabilities, not perfection. To continue to build your wealth, you don’t have to be right all of the time, you just need to learn how to lose less when you are wrong.
I have combined these four letters to create a simple formula that is time tested and proven to make investors and traders wealthier.
The reason why this formula works is because everyone makes money trading. That is the easy part. In fact, if you ever have the opportunity to see the actual “hit rate” or frequency of being right verse wrong on trades, you would find that traders (regardless of experience or success) make money about 50% of the time.
In a game where the only three things that can occur is the market goes up, down or sideways, then it makes sense for 50% to be the natural win/loss ratio. * There are some trading strategies like quant and relative value that have higher hit rates; but that is a whole different ball game and not one I am going to address in this post.
So if traders, on average, are right only 50% of the time, meaning they make money 50% of the time and lose money 50% of the time, then how do some of them manage to be profitable?
The answer is that when they are right, they make more money than they lose when they are wrong. Framed another way, you could say that making money is actually the easy part (you are going to do it 50% of the time). The hard part is how to keep it.
That is why successful investing and trading is about losing less money or what we call Risk Management.
The way I have taught my clients to lose less money is by embracing the formula:H + W + P = E
Edited Article - Source: http://www.drdoug.com