In June of 2014, Rafael Nadal won the French Open title, earning his 14th overall major championship.
Winning that title gave Nadal an unprecedented run of nine French Open victories in 10 years. For most people that solidified him as the best clay-court tennis player to ever play the game and one of the all-time greats.
As a swing trader, you might not be of any interest to you (unless you’re a tennis fan like I am). But you need to understand how and why he won.
Believe it or not, tennis and trading share a major characteristic. And if you don’t understand it, you may end up losing all of you money!
Tennis is not simple game it seems to be. It’s really two different games, depending on who’s playing. When a professional like Nadal take the court, tennis is a “Winner’s Game.” However when amateurs play, tennis becomes a “Loser’s Game.” The key difference will become clear in a minute.
When two professionals play tennis, the winner of the match determines the outcome. However, in amateur tennis, it is the loser determines the outcome. When you think about it, it makes total sense.
A tennis professionals will hit many more winning shots than unforced errors. A pro tennis player will earn about 80% of the points so that means they only lose around 20% because of bad shots.
Amateur tennis is exactly the opposite. Amateurs tennis players tend to lose around 80% of their points. They only actually WIN 20% of the points.
Now this may not interest you BUT using this simple idea to develop a winning strategy for amateur tennis players. All you have to do is play conservatively. By keeping the ball in play and letting your opponent to make an error and lose the point.
They try to beat you by winning points but they most likely they will fail. He or she has no idea that amateur tennis match is a Loser’s Game and his losing decisions will easily allow you to win the match.
Now we will get to the point! Trading is a Loser’s Game.
There’s a reason so few institutional traders and investors can do better than the S&P 500. They spend all of their time focused on trying the WIN. They’re constantly playing to win don’t even consider the opposite strategy of playing defense.
There are a few experts out there who find areas to exploit and consistently win. But most professional traders who constantly play offense end up losing money.
Over 60% of actively managed mutual funds do not beat the benchmark S&P500 from 2008 to 2012.
Now I’m not saying you need to give up, buy an index, and be done with it. However you need to focus on playing defense and forget hitting winners and focus on keep the ball in play.
There are two simple ways to play great defense as a swing trader and by using them, you’ll eliminate two of the most common mistakes swing traders traders make, especially newer traders.
The first is knowing when to sell. The simplest way to do that is with trailing stops.
If you set a 10-15% trailing stop, the most you will lose is 15%. You’re ahead of most traders just by focusing on your max loss per trade by playing defensive trading.
Your second defensive tool is to never put too much money into a single trade.
Remember, we’re not playing professional tennis. We’re playing amateur tennis.
Trading – for the most part – is a Loser’s Game. Don’t spend your time playing offense and trying to win. Focus on playing defense… by using trailing stops and proper position sizes.
These two ideas will protect you from the biggest mistake a trader can make – catastrophic losses. And avoiding mistakes is how you’ll win the Loser’s Game of trading.
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– Robert Walsh