Loss recovery systems

17/12/2016 | By | Reply More

A very common question I’m asked on specific trading strategies is ‘what do I do’ about losses.

Puzzlement

At first, I was pretty puzzled by this question.

You expect losses, they are part of trading. Trading is all about getting a positive expectancy. If you trade at random you will end up with random results. Because the market is generally very efficient this means that, excluding costs and commission, you will end up neither winning nor losing a massive amount over time. Imagine tossing a fair coin, over the very long term you wouldn’t expect to lose or win much.

That’s great on the loss side of the equation as losses become self-limiting, but not great on the profit side, the are also limited. So you have to either win more, lose less or win more often than you lose in percentage terms. It’s nothing more complicated than that. Either in percentage or monetary terms you have to win more than you lose. If you have a higher strike rate it’s possible to end up positive in the long term even though you may lose more when you lose. But it’s because that happens less often.

Anyhow, putting the complexity aside. You have to win more than you lose, that’s how you make money.

Overcoming losses

For me, loss recovery is a process that I do through the positive expectancy in my betting or trading. When I trade over a day I’m pretty sure I will finish with a profit at the end of the day. If I sink to an early loss or can’t seem to get going, I don’t panic. I just carry on working away at the market and doing the best I can at each attempt.

I do this because I know from recording data and my long term results that I have a positive expectancy, I will win over time. Therefore if I get a loss, it’s just one of those things and it won’t matter eventually as I will overcome it. Losses are inevitable, some you can’t influence, so don’t worry about them. But do worry about your long term edge, as that will be the source of your profitability.

Even if you have an edge, depending on how big that edge is, you may still lose money on a session but still make it profitable at the end of the week, month or year. This is somewhat dependant on how you have framed the opportunity.

Having this approach is only something that really comes with time. When you start out, there will be a tendency to avoid all losses or put too much weight on them. If you try trading at random at some point, you will realise that even at random, you will get a positive trade which balances them out and that should give you more confidence.

Loss recovery

A lot of systems, ebooks and various junk out there has an interesting approach to edges. Generally, they don’t have one and can’t prove that they have one. So most of these processes start with a high probability trade. By that, we mean one that has a good chance of happening.

Most of the time this happens and the person that did it is pleased. You can go on quite long profitable runs with these strategies before the losses arrives, what should you do?

If your system has an edge, you don’t worry about it, as long term you will make a profit. Your decision-making process is valid and you will win more than you lose over time. But most of the systems we are talking about here, ask you to go through loss recovery process.

The most famous loss recovery process is the good old, double after every loss, ‘martingale‘ system. The problem with all these systems is that they ultimately fail. I’ve prepped a detailed video on Martingale and will post at some point to highlight the failure points. But where you have a spread in price and commission to pay ANY attempt to chase losses will eventually be undone by the fact that your positive edge (if you had one) on the initial trade, will eventually be overcome by the cumulative spread and commission.

Modern loss recovering systems can be quite complex, much more subtle than something basic like a martingale and you see them in use on a lot of markets like football where the opportunties to cover a postion are many. But that just hides this underlying point. You may get away with it for some time, but eventually, the chicken will come to roost. It’s a mathematical fact that’s been proved endlessly.

You may get away with recovering losses for some time and things look rosy. But eventually, your system will collapse under the weight of trying to avoid a loss.

The solution

The solution to your problems is simple: –

Find an edge and don’t chase. Take your losses like a man!

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Category: Trading strategies

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