Dealing With Losses
I'm not sure if you guys have discovered Gatis Roze, one of the newer bloggers over at StockCharts.com. I mentioned his new blog back in the Spring, and he certainly did not disappoint. He's been pumping out blog post after blog post. And since I read a ton of technical work everyday, it's nice to sometimes sit back and enjoy more of a philosophical discussion on trading and investing.
One of his recent posts at The Traders Journal - "How I Deal With Trading Losses" is a must read. Here are a few things that stuck out to me:
As I see it, there are two types of losses. The first type of loss is simply a result of the laws of probability and is to be expected if you follow your methodology. I tell my classes that I lose about 4 out of every 10 trades. The novices in the class react by asking themselves why they are taking an investment class from such a loser. The experienced investors nod their heads in approval. The point is that when I lose, I cut my losses quickly to minimize the costs. When I have a winner, I let it run. It works out to be a net positive as the winners more than compensate for the losers. For you sports fans, another way to look at it might be to ask: how much would a baseball team pay me if I hit only 6 out of 10 times at bat?
The second type of loss requires much more attention, introspection and brutal self-honesty. Losses that result from ignoring your trading plan or other bad behavior is what we all need to minimize. There should be no such thing as “learning to live with it” when it comes to the second type of loss as it does with the first kind of loss. Instead, the objective here is to appreciate and understand the difference between these two types of losses and to not let your confidence get eroded in those instances when you traded your plan but a small loss resulted nevertheless.
Trading is a journey. Don’t let anxiety ruin your experience or your profits. Whenever I book losses, I just consider it as tuition paid to Wall Street University. It’s not that I’m stupid – I just need to pay for the privilege of learning a very important lesson. Historically, I pay tuition only once for any particular lesson.
After all these years of trading, one piece of advice I’d offer my novice readers is to focus on the process. Don’t focus on the dollars and the results. Your performance will take care of itself if you can follow the game plan.
A few quick caveats:
- There is no place for denial in successful investing.
- Don’t blame your losses on bad luck or outside manipulators. Accept the responsibility yourself.
- Don’t be dependent upon trading for all your fulfillment and happiness.
- Focus on opportunities, not on regrets.
- Proper risk control and discipline is non-negotiable for every trade everyday.
- Revenge trading – trying to make back a loss – carries with it far too much emotion and is always costly.
- Poor money management skills are the number one reason that novice traders wash out.
- Learn to recognize your impulsive state of mind and take action to stop it.
Even the best traders in the world book small losses on a regular basis. If you manage your emotions with consistency and if you strive for a disciplined trading mindset, then you should have no problem surviving a string of bad trades and showing profits at the end of the year.
Go check out the entire post: How I Deal With Trading Losses
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