There are numerous people who will tell you how to make money in the market. But what you don’t often see, however, are ideas written on how to lose money.
"Cut your losers and let your winners run" is common stock market trading advice, but how do you determine when a position is a loser?
Interestingly, most traders don’t formulate an answer to this question when they put on a position. They focus on the entry, but then don’t have a clear sense of exit - especially if that exit is going to put them into the red.
One of the real culprits is in the difficulty traders have in separating the reality of a losing trade from the psychological sense of feeling like a loser. At some level, many traders equate losing with being a loser. This frustrates them, depresses them, makes them anxious - in short, it interferes with their future decision-making, because their P&L is a blank check written against their self-esteem. Once a trader is self-focused and not market focused, distortions in decision-making are inevitable.
- The unsuccessful trader will respond with frustration:
"Why do I always get caught buying the highs? I can’t believe 'they' ran the market against me! This market is impossible to trade."
Because of that frustration - and the associated self-focus - the unsuccessful trader does not take any information away from that trade.
The
successful trader will see the losing trade as part of a greater plan. Had the market broken nicely to the upside, he would have scaled into the long trade and likely made money. If the trade was a loser, he paid for the
information that this is, at the very least, a range-bound market, and he might try to find a spot to reverse and go short in order to capitalize on a return to the bottom end of that range.
Look at it this way:
If you put on a high probability trade and the trade fails to make you money, you have just paid for an important piece of information:
The market is not behaving as it normally, historically does.
If a robust piece of economic news that normally sends the dollar screaming higher fails to budge the currency and thwarts your purchase, you have just acquired a useful bit of information:
There is an underlying lack of demand for dollars.
That information might hold far more
profit potential than the money lost in the initial trade.
Instead of viewing losses as a threat, treat them as an essential part of trading. Taking a small loss reinforces a trader’s sense of discipline and control - without which may lead to
overconfidence in stock trading.
Losses are not failures.
- So here’s a question to all those who enter a high-probability trade:
"What will tell me that my trade is wrong, and how could I use that information to subsequently profit?"
If you’re trading well, there are no losing trades: only trades that make money and trades that give you the information to make money later.
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