In case you’ve been living under a rock, you’ve probably seen a clip or at least caught excerpts of Roger Federer’s commencement speech at Dartmouth University.
While his advice to graduates applies to life in general, some of the “tennis lessons” he shared are also relevant to trading.
Here are three memorable quotes from his speech that are helpful to keep in mind when playing the trading game:
1. Dealing with losses
“The best in the world are not the best because they win every point. That’s because they know they will lose again and again… And I have I learned how to deal with it.“
Loss is an integral part of trading. Even experienced traders face losses or drawdowns throughout their career, but the important thing is to know how to recover from them.
Of course, dealing with losses, especially consecutive losses, is easier said than done, and it takes some experience and a great deal of self-confidence to be able to get back up and keep at it. Another common risk that comes with losing streaks is retaliatory trading, which is likely to do more harm than good to a person’s account.
One of the key things to remember is to not take losses personally and strive for progress, not perfection.
2. Expectation is important
“In the 1,526 singles matches I played in my career, I won almost 80% of those matches… What percentage of points do you think I won those games? Only 54%“.
Too often, novice traders focus on superficial trading metrics that don’t necessarily paint the full picture of their performance. Some zoom in on bottom-line profitability while others only look at the P/S ratio, potentially missing other factors that could improve their overall game.
In trading, prediction is important because making money and always being right are not mutually exclusive. You can be on the right side of a trade most of the time, but if your winning trades are less than your losing trades, you will likely end up in the red.
3. On recency bias
“When you play a point, that’s the most important thing in the world. But When he’s behind you, he’s behind you. This mindset is really crucial because It frees you from fully committing to the next point And what’s next after that With intensity, clarity and focus.“
It is not uncommon for traders to get swept up in the positive or negative emotions of a big win or loss, which then tends to influence the decision-making process of their next trades.
In other words, winning trades may lead to a trader becoming overconfident and feeling invincible, to the point where he bets more or forgets about proper risk management in his next setups. On the flip side, large losses can also cause a trader to double his positions in an attempt to make up for the downturn.
Overcoming recency bias is a crucial skill for forex traders because it helps one remain objective in reviewing previous settings and move on to the next with fresh eyes and a clearer mind.