Accepting losses is the most important trading decision we can make
Learning how to accept losses is undoubtedly one of the biggest challenges we face as traders. Losses may occur while trading and there’s no other aspect of our lives in which we have to set out a plan, which involves part failure as an integral part of the process. In certain ways we are inviting failure into our lives when we trade, which rails and repels against everything we’re taught in our early formative years.
When trading, it is important that we don’t internalize, or get too deep ruminating over the concept of being successful were trading is concerned, we’re trading to take money out of the markets, to make ourselves wealthier, to build a better future for our families and we should attach no shame to that objective.
Accepting and learning to deal with losses, given our backgrounds and upbringings, is an incredibly difficult, emotional barrier to face up to, but an obstacle we have to overcome at the earliest opportunity. We can’t learn to love our losses, even if we take the optimistic view that based on probabilities, the loss we’ve just incurred means we’re closer to the inevitable gain we’re about to make. We have to take on board that losses are a part of doing business in our business.
We learn quickly that there’s no holy grail of trading, there’s no 100% sure proof method to never lose, every trading method and strategy has a distribution of losses versus wins, our win loss ratio. And a 60:40 win loss ratio could deliver incredible results. But concentrating on that example can be a sobering statistic; a successful trading strategy would be one were we lose 4 trades out of 10. To the uninitiated and inexperienced, 4 out of 10 losing trades sounds high, and if those losses arrive in quick succession then we can easily become disheartened and thrown off balance, at first doubting and possibly terminating our trading method.
Perhaps we should regard our losses as overheads. If we were running any other small business then we’d have daily costs; rent, insurance, stock depreciation, lighting and heating costs, wages, marketing, advertising etc. Whereas in our retail trading industry, we have practically zero overheads; our money is our stock, and in theory we could travel the world trading from the cheapest destinations. There are days when a small business operator takes no takings or periods of time when business is thin on the ground. Hopefully they won’t panic, they’ll rationalize the current situation, analyzing the reasons for the slowdown. Is it seasonal, is it the days of the week, is it the overall image of the business, does the stock need refreshing, or if a restaurant is it time to change the menu? We can apply similar technical and fundamental analysis to our trading.
If we’re operating our own retail trading business correctly then we shouldn’t lose much of our account on a daily basis, we may have a €20,000 account and lose a maximum of 2% on any given day by setting a circuit breaker, €400. Now our small business person may have the same on deposit and have to pay a week of bills costing €2,000 per week. We’re in a position to limit our losses by less, we can in effect not trade and we won’t be exposed to risking our capital, a luxury that a small retail business operator can’t afford.
