I know it sounds cliché, but losing truly is part of winning, especially in trading. If you want to become a complete trader who truly knows how to trade properly, you must learn how to lose properly in addition to actually learning how to trade.
I know this isn’t perhaps a ‘fun’ topic to discuss, and you may not even want to read this article, but I promise you that is a huge mistake. You simply will never make money as a trader if you don’t understand the importance of losing properly in the market and how to do it.
So, for those of you who are looking for an ‘easy fix’ or ‘fast money’ without any losses, you may as well stop reading now. For the rest of you who truly want to have a chance of making consistent money trading the markets, read on…
Prime your brain for losing properly…
All too often, I see beginning traders trying to avoid losses in a number of different ways. It seems that people are pre-wired by nature to try and avoid losses, it’s a normal tendency. But, when it comes to trading, this pre-wired trait does us significant damage and will even result in blown out trading accounts and irreversible damage, if you allow it to.
Unfortunately, losses are part of trading, if they weren’t, everyone on Earth would be a billionaire, and we all know that isn’t possible. The simple reality of trading, is that you are going to have losing trades one way or another. If you don’t take predefined, calculated losses, you are going to take big, potentially account-blowing losses eventually. Remember; you can delay losses, but you cannot avoid them altogether, and there is typically a direct correlation between how long you delay a loss and how big it becomes.
As a trader, you need to simply view losses as a ‘cost’ of doing business in the market. Any business has costs that need to be overcome in order to turn a profit. If you own a restaurant you have operating costs like food, labour, rent, utilities, book keeping, etc. If your revenue surpasses all of these costs, you will turn a profit, if not, you lose money.
So, in trading, your costs are losing trades, broker fees / commissions and perhaps any equipment costs like a laptop etc. If you start viewing losing trades as just a part of the costs of trading, you will begin to shift your thinking from ‘trying to avoid losses’ into trying to MANAGE losses.
Why you need to learn to lose properly
By learning to lose properly you will be learning to control your losses below a predefined dollar amount per trade; the trade’s ‘R value’. The great thing is that YOU decide how much money you risk on any one trade, so that ability gives you the power to eliminate any ‘surprises’ and thus any emotion from your losses in the market.
Traders experience pain and frustration from losers for two reasons:
- They ‘expect’ to win on a trade but instead they lose.
- They lose more money than they are emotionally prepared to lose per trade.
Luckily for you, these two things are very easy to fix if you’re ready to be honest with yourself and face reality. To manage your expectations of a trade, you simply have to understand that any one trade can be a loser and that you never can know ‘for sure’ which execution of your trading edge will be a winner and which will be a loser. Thus, you should never ‘expect’ to win any given trade, no matter how ‘good’ it looks.
For the exact reason just discussed, you should never risk more money on any given trade than you are totally emotionally / mentally OK with potentially losing. That is to say, because you can’t know for sure WHICH trade will win and which trade will lose beforehand, you simply cannot go jacking up your risk beyond levels you aren’t totally emotionally / mentally Ok with losing. IF you do it anyways, it’s your fault you lost more than you’re OK with and all of the emotional trading mistakes you make in the wake of that mistake are your fault and yours alone.
The take away from all this, is the following: In order to lose properly you have to first prime your trading mindset to shift how you think about losses. You have to shift from trying to avoid losses to trying to accept them and learn how to manage them. You have to shift from expecting to win every trade, to remembering that you won’t win every trade no matter what, and you don’t know which ones you will win and which ones you will lose, so have no expectations and don’t ever risk more than you are OK with potentially losing on any one trade.
How to lose properly
OK, so you’ve read the above section and you have accepted the nature of trading for what it is; a random distribution of winning and losing trades.
Now, let’s discuss in 5 simple steps how you can lose properly on any given trade that you take:
The first step to losing properly (as discussed in the above section) is accepting that you will have losing trades no matter what. Once you accept this, you can move on to the next step, which is about devising a plan to minimize your losses as much as possible.
Next, determine the dollar amount or R value you are comfortable with potentially losing on any one trade. As I’ve written about before, we do not measure risk in pips or percentages, we measure it in dollars or pounds, euros, etc.
Now, you need to calculate your position size on the trade. You do this by first finding the best place to put the stop loss, and then you figure out how many lots you can trade so as to not exceed your predetermined R value on the trade. Remember to place your stop loss based on surrounding market structure (price action / key levels) not on greed or emotion.
Set and forget the trade. After you have set the trade up and input all the parameters: entry, exit (stop loss and profit target) and position size, it’s time to forget about the trade for a while. One of the biggest steps to learning to lose properly is simply not interfering with your trades. Most of the time, simply removing yourself from the equation after your trade is live, is the best idea, and for all beginners it’s what I recommend.
Don’t try to avoid the loss. This is where psychology comes in and can mess you up. You absolutely cannot make huge mistakes like moving your stop loss further away as price approaches it. You have to remember you can’t avoid the loss, eventually it will catch up to you, even if you happen to ‘avoid’ it this time, you will be building a bad habit that will eventually result in a huge account-ending loss. You’ve got to stay true to your strategy and remained disciplined and accept that the market will stop you out sometimes for your predetermined 1 R loss. As I discuss in this article on risk management, a successful trade exit can be either a winner or a predetermined loser. If you take that loser as you planned, that is still a successful exit, even though it’s a loss. Success is sticking to your plan and being disciplined.
Final thoughts on losing properly…
Please do not blow this lesson off, if you do, it will be the biggest mistake you make as a trader. You’ve got to put your ego and your desire to win every trade aside, because both of those things are only going to cause you to lose money in the market, and I know you don’t want to lose money.
Trading is difficult for most people because they cannot come to grips with the FACT that they are going to have losing trades as well as winning trades. Most people screw up the losing trades by trying to avoid them, and by doing this they create a ‘monster’. This monster is bad trading habits that ultimately lead to an account-destroying loss.
The only way to win at trading is to control and manage your losses so that when you do have winners, they will be able to easily offset any recent losers you’ve had and then some, leaving you with profit. Remember, it’s just like owning a business; your revenue must exceed your costs to make a profit.