So we got an email about the sign or a picture of Paul Tudor Jones with something behind him that says “Losers average losers.” And the question was can I expand on that? And you know, I don’t know that I can, but it’s worth probably having a discussion on from a psychological standpoint. If you understand the context it’s, it’s describing a situation where say someone buys a stock at 20 and it goes down to 16 and they buy more creating an, a lower average cost, right? If they bought equal amounts of at 20 and 16, they’d have an average cost of 18 – that’s losers averaging down, losing trades. That’s what the context is. Now I don’t go and call people losers because it’s not terribly nice.
And you know, I don’t like to hear that about myself, but I think it’s losing behavior, right? Because people aren’t necessarily losers. They’re just trying to figure out what’s the best way to do this for themselves. But at that moment in time, when they have the stock or whatever at 20, and so now it’s 16. It leads me to believe that that person doesn’t have a hard stop on their number to begin with, which is a big mistake. And so, as it’s pulled back again, this is for trading not investing, right? We’re not talking about buying blue chip stuff. When you’re 25 and holding it for 30 years, we’re talking about trading, right? So then you have this reluctance to put in the stop and you have this situation where you’re reluctant to take the loss because how it might make you feel, or it might make the person or the trader feel by being wrong.
And then they amplify the bad situation, which could become worse by adding more risk on at 16, of course, dropping the average price to 18. You know, which if we go from 16 to 18, you’re back to break even. But I think we’re demonstrating this as something not to do and put in your hard stop, get stopped out and be done with it, clear your mind, the minute it goes to 16, and you start thinking about adding more, I’ve done a show on this. We called it the “moron strategy” and you don’t want to be in that spot. You don’t really want to add to losers. So that’s why he’s saying losers, average losers, losing traders, add more risk to losing positions. So the better part to be is get stopped out, deal with your feelings on being stopped. And again, I’ll come back to back testing.
If you put a trade on and you don’t become emotionally invested in the outcome, because it’s just another’s trade, right? That’s all it is. It doesn’t matter what the ticker is. Doesn’t matter what the instrument is. It’s just one of hundreds or thousands of trades that you’re going to put on. So you learn the hard way to not become in love with any one particular trade. Doesn’t matter. The fundamentals, the market environment doesn’t matter. The chart pattern. Does it matter what you did in your last 10 trades, right? If you toss a coin it’s 50 50, right? So same thing with a trade, you have the expected value of a trade and you should know that going into it. I keep talking about back testing and knowing the data. If you know the data, it can set you free emotionally and you don’t want to be in a spot where you have to negotiate with yourself by doing like not putting in a stop or lifting your protective stop, or then being reluctant to take the loss where you should have.
And then even thinking about buying more, right? You want to buy strength, not by weakness. You don’t buy dips. I know other people feel differently, but you know, in this type of a market, how’s that working for you. So you don’t want to find yourself in that spot. because what happens is, in my opinion, you can test this. If the trade doesn’t start making you money right away get out of it even quicker. Don’t even wait for your protective stop to get hit. If your stop was at 18 and you start losing money the first day, offset it by the end of the day, because the best trades typically are going to make you money right away. There’s no reason to sit there and agonize, just get out of it. What do you care? You’re just using the ticker to ride the wave. There’ll be more.
So then what happens is 16 brings you 12 and that brings you 10. So now you’re, you’ve got more risk on right? In a, in a thing that never worked out. It didn’t show you any hope that it was going to work out and you added more because you were reluctant to take a small loss. Now you’re sitting in these two big positions at 10 bucks. You’re down on both substantially. You’re down 50% on your first piece. And now it’s like, I can’t possibly sell and lock in this loss. Right? So you see this play out. It’s almost like a, a human condition. And so you can avoid that by don’t putting in alerts. Don’t tell me about alerts alerts. Don’t manage your risk, right? You don’t want to have to do any thinking. You want to be able to say I bought the thing at 20. My stop is at 18 and that’s religion. There’s no negotiating at that point. Stop out your equity, right? If it goes up 24, 25, 26, nice trade. Put your stop in at 24. See what you’re willing to risk to stay in the trade and invest your gains into the stop and then be done with it. Market’s going to go where it’s going to go. You don’t need screen time is bullshit. That’s all I have. You can subscribe to us on YouTube you can subscribe on, Spotify, Stitcher, Apple, and Google podcasts.
Podcasts. We’re all over. You could also listen to us on Audible, if you have Alexa and this and that, that works too. And I’ve been giving away the audiobook version of the Inner Voice of Trading, which seems to be really helpful in these types of markets. You can get that at Martinkronicle top right corner. It’s free.
Click here to get your free copy of The Inner Voice of Trading audiobook.