The Math Doesn't Work When You Suffer Big Losses

Sean McLaughlin
October 26, 2022

I was talking with a relatively new day trader last night at my twice-monthly trader meetups here in Colorado. We were chatting about stop losses. Or more specifically, his inability to stick to his “mental stop loss levels.”

As you can imagine, this was leading to him taking occasional big losses – which were wiping out good runs in the market.

He’d make a few hundred bucks several days in a row. He’d then lose it all (and then some) on one bad trade.

A lightbulb went off in his head when I reframed the importance of not taking big losses. No doubt many of you are shaking your heads and uttering – duh!

But for this gentleman, it took me breaking it down this way for him to get the picture: 

Look, every single trade you take has only 4 possible outcomes – you’ll win a little, you’ll lose a little, you’ll win big, or you’ll lose big.

That’s it. 

I doubt any of your big wins started out as big losses. So if you just close all small losing trades before they become big losing trades, you’ll be left with trades in the first three buckets. The small wins and the small losses will probably make up 85-90% of your trades and they’ll end up offsetting each other. But the remaining 10% of your trades will be your big winners – and that’s where 100% of your net profit will come from. Focus on this, and everything else will take care of itself.

We’ll see if any of this sinks in. I got him to promise to stick to this idea for the next two weeks until I meet him again at our next meetup.

I’m looking forward to hearing about his experience and what he’s learned so far.

~ @chicagosean

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