How To Make Your Trading Losses Smaller

[00:00:00]How do you make your losses smaller?

[00:00:01]This is a question I get asked a lot of.

[00:00:04]So, what I'm going to do is give you an example of how one of our traders did this. The key to making your losses smaller is thinking about things relatively. So, how do you make your losses smaller? It's all relative. A lot of it is about essentially making your winners bigger. So, let me give you an example.

[00:00:23]This is looking at one month for a trader. This was performance earlier on this year. What we've got is an average win that is marginally bigger than his average loss.

[00:00:34]So, not bad. No no real worries here.

[00:00:37]That on the face of it looks pretty good. His average losers are relatively small in terms of size. It And this is always a problem when people say, "I want to make my losses smaller."

[00:00:49]Do they mean in ticks? Do they mean monetarily? Small is relative. And what it has to be considered relative to is the size of your winners. So, what he's got here is slightly bigger winners compared to losers.

[00:01:02]Not a wonderful win rate, but on trades that's not all that bad. The problem that he's got essentially here is the only way that you can make money out of this is you've got to either up the win rate or you need to make those winners a little bit bigger because on the face of this isn't actually going to make you any money. So, whilst your average win to average loss is fine, ultimately you're not making enough of it.

[00:01:29]Now, the way that we approached this was then to look at it and say, "Okay, well, one of the things you probably need to do and this comes down to understanding a trader. You need to ask the question of yourself here.

[00:01:41]Is he needs to take a bit more risk. One of the problems that he had is that giving trades not enough space meant that he was actually taking his losses too quickly. So, whilst they were staying small, there was a lot of trades that he probably didn't need necessarily to be losing on. At the same time, could also be a case that he's banking winners too quickly. So, the relative difference between winners and losers isn't there because of the fact that you're getting out of your winners too quick. You've got to ask yourself, what is it that's causing that relative difference between winners and losers. Having tried to implement those changes, what we then get is a situation where now the size of winners is getting bigger. He's taking a bit more risk. The losers have got a little bit bigger. So, this is a slight problem. You could say, "Well, those losers are getting too big." They're not because they're covered much more comfortably by the winners.

[00:02:37]The other thing that's really noticeable is the median trades. Those sort of, you know, not big winners, not small winners, your middle type trades.

[00:02:47]His median winners are now there.

[00:02:49]So, what this is showing you then is whilst his win rate is small, on the whole, he's going to be able to make money with a win rate like that because the relative difference between the two.

[00:03:02]You know, we're at a point where this is approaching double.

[00:03:06]That's really where you want to get to.

[00:03:08]You want your average winners to be double your average losers.

[00:03:12]So, the next step then is to become a little bit more selective.

[00:03:17]Can he reduce the number of trades because there's probably an element in here that there are trades that perhaps are not all that great that are causing some of these the average losses to creep up. And perhaps there is more scope then for finding a few bigger winners by being a little bit more selective on what you really deem a good trade here.

[00:03:41]Also, you can add more size to those.

[00:03:44]The better that you understand the trades you take, the more size you can add.

[00:03:49]That pushes the upside. By pushing the upside, again, those losers relatively become smaller. So, he does that. We're now at a point where we are pretty much bang on double. Okay, if it was $2 more on his average win, it would be exactly double. So, we're in a great place now.

[00:04:08]Double the size of average win to loss.

[00:04:11]Yes, the win rate has dropped slightly further.

[00:04:14]Again, not a big worry.

[00:04:16]I'm looking at traders and thinking, as long as their average win rate is better than about 30%, we're not too worried about that. The big area of improvement is the fact that the relative size of winners to losers is much, much bigger.

[00:04:30]If you look at how much the average win has grown. The average win has increased by just shy of $90. The average loss has increa- increased by just 20. That's where the difference is. That's how you make your losses smaller. It's about making your winners bigger. He's now got a good base.

[00:04:51]Can increase size generally, so increase clip size, but also trade selection.

[00:04:59]If you can continue to improve on that trade selection, that may well start to just inch that win rate up, and so it makes it even more robust.

[00:05:09]That's now a point where you can say, "Do you know what? He has made his losers smaller."

[00:05:15]And it's all about making them small relative to your winners.