Why "Being Right" as a Trader Is Wrong

01/02/2012 8:00 am EST

Focus: STRATEGIES

Jeff White

Founder, TheStockBandit.com

Jeff White explains why accuracy and "being right" as a trader can actually lead to big losses. Here's why.

I’m here with Jeff White, recovering golfer turned profitable trader, and I have this question for you.  Is accuracy overrated?

Yes, absolutely.

No kidding.

No kidding.  Lots of traders, myself included, have been through phases where you want to be right all the time.  We’re taught in life that it’s good to be right.  I want a doctor who’s right all the time, I want a lawyer who’s right, but in my trading it doesn’t have to carry over that way.  It’s easy to think that you’ve got to be correct a lot to make good money in the markets and it’s really kind of a flawed approach.  It gets a lot of people in big trouble, and I’ve found, in fact, some of the most accurate techniques can—the times that they fail—become the most expensive ones.

So you can—by attempting to be right all the time, whether it’s for psychological purposes or whatever—you can actually do more harm to your trading account than by what else, what’s the opposite of that?  Focusing on what?

Focusing on making more when you’re right and you’re losing when you’re wrong, so it’s really a matter of skewing that profitability versus loss in such a way—in terms of size.  I’m winning more money, or I’m more profitable in a winning trade than I’m losing in a failed trade, so it’s a matter of not so much trying to be right more often, as it is be right bigger and be wrong smaller.

Make it count when you’re right.

Absolutely.

That’s a critically important subject.  Are you more a discretionary trader or a mechanical trader?

I’m a discretionary trader.

What do you do when you start your day?  You sit down at the charts and what do you?  Are you looking at the news, the charts, the technicals, the fundamentals, what are you looking at?

I’m really looking at the technicals and I’m looking at the charts and I want to see key levels get crossed and I want to see it done on volume and I want to see the price action, above all things.  I will pay attention to some news, in terms of why a stock might be on the move, but generally, I walk into the trading day with my own trading plans set, so it’s just a matter for me, primarily, of executing that plan, and sitting on my hands if those levels aren’t crossed, so what I’m trying to do is follow the plan that I’ve laid out the evening before when the markets closed, when my mind is a little quieter, and I don’t feel that urge to chase the most recent bar in the futures because I’m feeling left behind.  That can get me into big trouble as well.

Well, the fear of missing out is what can cause so much damage in my own trading, too.

Right.

We miss a trade and then we try to make up for it later.

Right.

When you’re going for these profit targets that are somewhat larger than maybe average, because you really want to make the winters count, how long are you in these trades for?

I’m in trades anywhere from a few hours to maybe up to a few weeks, and so what I’m aiming to do is first of all, accept that I’m going to be wrong some.  I know I’m going to be wrong today.  I might make losing trades today, I might be entering trades that all close for loses in the coming days.  It’s a matter of looking at the bigger picture.  I’m willing to sacrifice some of the battles to win the war, in terms of giving up some of these trades and understanding that this just didn’t work out the way I expected, but I’ve got some other ones that are lined up and I know that it’s really a numbers game.  It’s a matter of just keep putting my money in the right types of risk and knowing that over time it’s going to pay off for me.

From the game of golf that rewards the lowest score to the game of trading that rewards the highest score, thanks Jeff.

Related Articles on STRATEGIES