If we go into a trade thinking, assuming, or believing our analysis is assuring us of a winner, what we've done is eliminate from our thought process the possibility of losing.
If we've eliminated the possibility of losing, then what would we use as a resource to tell us:
- we're in a trade that isn't working or
- a trade that never had any potential to be a winner
We have to genuinely believe that's it’s possible for a trade not to work to be able to recognize we're in a trade that isn't working.
If you can't recognize when you're in a losing trade, it won't make any difference how good your analysis is, because you'll always be susceptible to a catastrophic type of loss that wrecks your equity curve.
The most common error the uninformed trader makes is not defining the potential cost of a trade before it he gets into it. Whereas the professional will always, without exception, determine in advance of getting into a trade precisely where the market "shouldn't" be for the trade to still be defined as a potential winner.
If anything can happen in the markets at any moment, it implies there's no perfect analytical method that can accurately factor in all the possible ways the market can impact the direction of prices in any given moment. In other words, there's nothing we can do in advance to prevent, or avoid, finding ourselves in a losing trade.
What we can do is always be prepared when we find ourselves in a trade that isn't working.
More often than not, what we are Thinking, Assuming or Believing we Know about the market in the moment, will be in direct conflict with what our exit strategy says we need to do.