How can we change our mindset and approach trading from a different angle to ensure we do everything practice capital protection? How can we become more defensive minded and conservative with regards to our capital? Let's think of this from a sporting perspective.
Sport at the highest levels provides interesting parallels with trading. It captures all of human emotions and often the stakes can be high and the pressures enormous.
In recent times, two differing approaches to their golf game have provided two of the game's best different fortunes. In the 2006 US Golf Open, Phil Mickelson was about to tee off on his last hole with a 1 shot lead. He needed to par the hole to win his first ever US Open in front of an adoring crowd or less preferable, bogey to at least remain alive in a playoff with Australia's own Geoff Ogilvy who had already finished his round. As he considered his final hole, he reached into the bag and pulled out his driver (this club is considered the riskiest of clubs off the tee due to its potential lack of accuracy - players often hit their driver for increased distance, which is the payoff).
The commentators at this stage were almost speechless as he didn't need to take the risk of hitting the driver and could have easily hit a safer club not as far up the fairway to ensure his par. His tee shot looked bad straight off the tee and headed well left and bounced off the roof of a marquee. His ball landed behind a tree and when he had hit his second shot, he was not much closer to the hole after striking another tree. A playoff at this stage was looking good. His resultant double bogey handed Geoff Ogilvy the US Open title on a platter and drew many shakes of the head from commentators and fans alike as to why he didn't adopt a more conservative and defensive approach on his final hole.
In complete contrast, considered by many the best player ever, Tiger Woods adopted an unusually defensive posture throughout the 2006 British Open Championship. Knowing that the roughs along the fairways on the course were big trouble, he decided to sparingly use his driver to ensure he remained on the fairways at all times possible.
He stuck to his defensive plan so well, in 72 holes of competition, Woods only hit a driver off the tee once. This is unheard of. Woods hit all but one fairway on the final day, and recorded a phenomenal 85.7% mark for the week (the leaders on the US PGA Tour normally average around the 75% mark.) This feature of his game was commented on individually by his fellow competitors and greatly contributed to his successful defense of the title.
It would seem that at the highest levels of sport, a defensive mindset and posture can lead to outstanding success and achievement. It appears that defense wins. How can we apply this to trading?
Accepting that protecting our trading capital is the most important aim in trading; it is clear that adopting a defensive posture can greatly assist in achieving this aim. What specifically can we do to ensure we protect our capital? Two things stand out for me:
- First, you must set stop losses for all of your trades and then more importantly execute them ruthlessly and without hesitation should they be triggered. Learning to take losses is the most important thing you can do to make money. Defensively, if you take the loss you are completely eliminating the possibility of further loss in that trade, therefore taking the right steps to protecting your capital.
Second, you must position size effectively. Don't commit a large percentage of your trading capital into one trade regardless of how confident you are of the outcome. Break your capital into small pieces and commit money into trades carefully once all of your entry conditions have been considered.
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By David Jenyns
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