The “War Stories” Most Traders Keep Secret

Click here to give a thumbs up or leave a comment

Click here to read transcript or leave a comment

I’m going to start with a warning.

What you’re about to see isn’t standard. It contains material that often falls through the cracks. You see, most people gladly talk about their big wins. This is true of just about every trader, adviser and fund manager I know. Their “war stories” typically involve huge gains.

But that’s only part of the story… what about their disasters?

Just think for a moment. How often do you hear people brag about a big loss? Chances are, your answer is “rarely”. You see, losses are an inconvenient truth for many people. They’ll happily tell you about their triumphs. But their defeats are another matter entirely.

But just like the winners, the losers have a story to tell. These war stories are every bit as valuable as the successes. Trying to forget them is a mistake many people make.

Now, a great way to learn about trading is to look back at charts of old trades. They let you see a situation in a way that words alone can’t do justice. And this can really help bring a strategy to life.

I’m going to show you two charts in a moment. They’ll help explain how you could avoid big losses. Understanding what this is one of the most important lessons in trading.

Okay, check this out:

This is a chart for Ioneer Ltd — a lithium exploration company. My Motion Trader system gave a buy signal when the shares were at 42 cents. The trigger was an upward break in the share price. Motion Trader set an exit stop at 27 cents.

Now, probability favours that a trend will continue. But it’s no guarantee. The reality is that some trades fail. That’s the just nature of the game. But rather than hold and hope for a recovery, my strategy is to cut the trade. And that’s what happened here.

Many traders do the opposite… they put off a decision to sell. They tell themselves that the shares will eventually come back. And sometimes they do. But it’s when they don’t that you need to worry. The shares in this example lost another 55% in the months following the exit signal.

Here’s another example:

Motion Trader’s strategy is to buy into strength. And that’s exactly what it did here. The system’s entry signal was routine and uneventful. But here’s the thing: Even a textbook entry doesn’t guarantee of profitable outcome. There isn’t a system on Earth that knows the future. And losses are inevitable.

To be successful over the longer term, you need a strategy for the trades that fail. You see, trading is essentially a numbers game. It’s about investing in stocks that have the makings of a winning trade. And then exiting those that fall short of their potential.

Motion Trader’s process for selling a poor performer is an exit stop. This is the system’s get-out point… it’s the backstop for every trade the algorithms identify. Sundance is a case in point. After a good start, the shares began to fall. There was no holding and hoping for a recovery. The trade was over the moment the shares hit the exit stop.

Motion Trader’s hypothetical loss for Sundance was 26.6%. But it was much worse for anyone without an exit plan. The shares went on to lose a further 65% in the following months. It’s a “war story” many will want to forget.

Stocks like Sundance and Ioneer are portfolio killers. Owning a few of them could be devastating. I’m sure more than a few people rode them all the way down. But it doesn’t need to be like that. An exit strategy could make all the difference.

You know, many people try to forget their failures… they put them to the side and pretend they didn’t happen. But that’s a mistake. Don’t be afraid to reflect on your less-successful trades. You can learn a lot from the ones that don’t work out.

So that’s all for this week. If you liked this video, or even if you didn’t, scroll down and leave me a comment, or maybe a thumbs up. Also, if you’re watching this anywhere other than my website then head over and have a look.

So until next time, I’m Jason McIntosh, and let’s find some trends this week.

Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.