Taking Trading Losses – Get used to it

Walter Hagen: Good at taking losses

I used to play a good bit of golf growing up.  So much so, that after awhile, I got pretty good at it…sometimes getting close to even par on a really, good day.

But sometimes, no matter how well I played, sometimes I would make a mistake…a really dumb mistake, and it would unravel the whole rest of the round.  Most of the time it was because after I made a mistake, let’s say hitting a shot behind some trees, off of the fairway.  Rather than just taking my lumps and punching it out sideways back onto the fairway, I tried to make up for it by hitting a low-percentage shot, trying to get it onto the green by whistling it through some trees and hoping it wouldn’t hit any branches on the way…trees are 90% air, right?

Most of the time, the ball would disappear, but the awful sound of my ball hitting leaves and branches greeted my ears.  From there, the ball would many times be in even further trouble, deeper in the woods, perhaps out of bounds.

A mistake that leads to more mistakes, more unforced errors.

I hated the fact that I had played so well and made just the one mistake.  Rather than accepting the mistake, I tensed up and tried to fight the inevitable, making things even worse.

This doesn’t usually happen to the greatest golfers.  Granted, they make fewer mistakes than the average weekend duffer, but when they do, they react calmly and make a reasoned, high-percentage shot to get themselves out of trouble.

One of the greatest golfers, Walter Hagen (1892-1969)…had a wonderful Stoic outlook on taking losses and moving on from his mistakes around the golf course.  Here are a few of his most famous quotes…

I never played a perfect 18 holes. There is no such thing. I expect to make at least seven mistakes a round. Therefore, when I make a bad shot, I don’t worry about it. It is just one of the seven. – Walter Hagen

Every golfer can expect to have four bad shots in a round and when you do, just put them out of your mind. This, of course is hard to do when you’ve had them and you’re not even off the first tee. – Walter Hagen

He would just accept the bad twists and turns the golfing gods threw at him and move on.

The same can be said for any successful trader.

Losses are the most important part of trading

If you have ever read the book, Market Wizards by Jack Schwager, let me summarize the most important characteristic shared by traders that each had wildly different trading strategies: They all take their losses, many of them, small ones.

  • They all accept that losses are going to happen.
  • Losses are part of the game of trading (and life).
  • We can’t control whether a trade will turn into an eventual loss

Many professional traders have a win percentage that is horribly low, with 90-95% of their trades being losers.  Yet they are wildly successful…and rich!

They take tons of tiny losses, but have a few, big winners every year.  A trading system like that would be extremely hard for most traders to adopt.

Why is that?

What are the reasons losing traders hate losses?

Losing traders hate losses.  Traders who blow up their accounts hate losses.  It is thought that most traders fail…because they have losses that blow up their account and they pack it up and often never come back.

Of course we hate losses!  I can hear you know, “Duh, Glenn, I freaking get it…Who doesn’t?”

But the successful trader learns to accept losses.  They don’t let their ego get in the way. 

Ego


Sigmund Freud popularized the word ego…the Latin term for “I”.

The self.  You.

We all know of someone who has a very large, over-inflated sense of how great they are.  They have a big ego.

But everyone has an ego, whether big or small or “normal”.

What makes taking trading losses difficult is that when we take a loss, we have to admit that we were wrong about the direction of the trade.  The untrained trader (the one who will wash out), views losses as damaging to their ego.  They tie their sense of self-worth, self-esteem, their EGO, to each and every trade.  Taking a loss hurts.  Hurts the ego.

The key then, is to realize that trading involves losses.  Nobody is perfect.  Trading is a game of playing the odds.  We are going to have losses…hundreds…thousands of them.  Accept the fact that taking a loss is actually a part of being a good trader.

Taking a small loss, and taking many small losses…. is what leads to being a great trader.

What can you resolve to do right now related to losses?

  • Before taking any trade, decide where you will get out.  Make sure it is a very small loss, ideally no larger than 2% of your entire account…probably 1% would be more ideal.  That means position sizing (which I will expand on further).
  • Resolve to NEVER average down (unless it is a disciplined part of your entry into a trade).
  • Accept that losses are a part of trading, just like winning trades are
  • Understand that you are a TRADER… here for the long-term.  You are going to be taking thousands of trades.  This current loss is just one, single, tiny trade of many future trades.  It is not the end of the world.
  • Realize that you can’t control what happens to the price when you have entered a trade.  It is completely outside of your control if you have a losing trade or a winning trade.  You can control your entry and your exit…that’s it.
  • Put aside your desire to be “right” or “wrong”.  Your desire needs to be executing your trading plan.  Take pride in being “right” by following your trading system…which is going to involve losses.
  • Realize that failure to accept taking a small loss now, will most likely lead to taking an even larger loss later
  • From the time you wake up, go through the day noticing how many things don’t go your way (losses).  Perhaps you spilled some coffee on your shirt, or just missed making the green light in traffic.
  • Practice, practice….practice taking losses.!

Good luck with your trading everyone & let me know if you need anything!

-Glenn

 

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