The Meaning of Being Right or Wrong in Trading

By | July 14, 2015

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros


When did you turn from a loser to a winner?
When I was able to separate my ego needs from making money. When I was able to accept being wrong. Before, admitting I was wrong was more upsetting than losing the money. I used to try to will things to happen. I figured it out, therefore it can’t be wrong. When I became a winner, I said: “I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.” By living the philosophy that my winners are always in front of me, it is not so painful to take a loss. If I make a mistake, so what! – Marty Schwartz in Market Wizards


A loss never bothers me after I take it. I forget it. Overnight. But being wrong not taking the loss that is what does the damage to the pocketbook and to the soul. – Jesse Livermore


Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead. – Larry Hite in Market Wizards

I could list many more such quotes, but I believe you can see the point that I want to emphasize: admitting of being wrong on a trade idea and cutting the loss short is one of the things that great traders have in common. Conversely, a desire to (almost) always be right in the markets is generally a sign of a beginning or failed trader.

Why is it such a difficult thing for the majority of traders to acknowledge being wrong ?  How do I know this for a fact ? Easy ! Just browse around forums or websites selling EAs. Look at the gurus peddling  everything from price action courses to ‘powerful’ indicators. You’ll see that (almost) everyone is claiming or looking for to be right at least 7/10 times. As to the ‘why’: because people approach trading with the ‘normal’ mindset of everyday life: being right means that you’re good at X, and the more times you are right, the higher your proficiency at X is. For instance, can you imagine a doctor who only arrives at the correct diagnostic in 5 out of 10 patients ? He’d be struck off from the medical register pretty fast. Or an accountant who only gets the tax affairs right for 6 out of 10 clients ? How long do you think he’d last ?

Even when we consider general day to day activities and social interactions, how many people admit easily to not getting it right about one thing or another ? Very few, because it hurts one’s ego and repeatedly being wrong most probably indicates lack of expertise in a particular field.

And this is where the distinguishing feature of trading lies. Winning (being right) or losing (being wrong) on a trade has no connection (it could even be argued that it has an inverse relationship) with how good you are as a trader. There are systems which have 100% winning rate during a period of low volatility, with markets in a defined range, and which soon blow up after a trend forms. And then there are trend followers who have a less than 50% win rate but have been beating the markets for decades.  The only way to measure a trader’s competence is by looking at his risk adjusted performance over a meaningful period of time.