From our first day at school we are taught to win.
Winning is good and losing….well that’s not so good. We are taught to win on the sports field, in the classroom and even in an argument between friends over which is the coolest car, a Ferrari or a Mustang. (Yes, of course it’s the Mustang)
The trouble we have is that when we win we feel like winners. On top of the world. On the other hand when we lose we tend to feel like losers. Now when we are wrong or lose something like a silly bet or a game of Tennis we may feel slightly frustrated but this sensation soon passes. You see the perceived consequences of the loss are negligible and we can react rationally to the loss.
However, for many traders a loss is viewed in a much more serious light. It is seen as a direct threat to the traders ability to trade or to their ambitions to become a successful trader. The trader turns the focus from the market, to himself. This results in feelings of deep frustration, anxiety and the sense of being at the mercy of a heartless cruel force bent on the destruction of their dreams and hopes.
And yes, feeling like this makes complete sense. We have been taught by school and society from an early age that winning leads to success and that losing leads to failure. Not only that, the trader has a smaller trading account after the losing trade quantifying exactly how big a loser they are. Frustrating Stuff.
It’s also completely irrational and has no place in the successful traders outlook.
In fact, the way we view our losing trades is one of the key factors predicting long term success in the markets. View losers in the negative light described above, and a long term prosperous trading career will remain nothing but an illusion that seems so achievable yet remains elusively out of reach.
As traders we need to believe that losing is part of trading. Really believe it. A restaurant owner understands there is a cost to running his business and he needs to use some of his profits to restock his pantry or he simply won’t have any ingredients to continue serving his customers.
In the same way, traders need to pay to find out whether their edge is going to work in a particular trade. We know that our edge works most of the time, but not all of the time. Therefore, the only way to find out if the edge is going to work in any particular instance, is to pay to find out.
It’s that simple and there are no exceptions to this rule.
If we can accept this to be true and a necessary part of the trading process, we can also adjust how we feel about losses. We can view the taking of small planned losses as proof that our risk management protocols are in fact healthy and working. Instead of viewing losses as a threat, we treat them as an essential part of trading. Taking a small loss reinforces our sense of discipline and control. Losses are no longer viewed as failures.
Seeing an upward sloping equity curve over time which you know includes many losses is a great reminder that losses do not pose the greatest threat to our trading success, we do.
Some tips to help you take firm control of your losers:
1) Reduce position size
2) Clearly identify when a trade becomes a loser and close it immediaetly
3) Imagine a line of dots representing future trades you will take in your trading career stretching out to infinity. How will you feel about this trade 100 dots down the line?
4) Focus on the big picture. Track your results and see this losing trade in the context of your quarterly or year to date performance.
When we see losers for what they really are, we come to expect them and strangely enough, need them.
As always, thank you for spending some time with me.
Wishing you all the best, in the greatest business in the world.
Probability Based Trading