How to Think About a Loss

jeff.whiteTrading Psychology3 Comments

We all lose here and there. It’s just part of trading. You can’t avoid it, but that isn’t the issue. Where many traders struggle is how to handle a loss gracefully.

Instead if equating a trading loss with personal failure, shift your mentality for what a loss means.

Does it mean you’re stupid? Not necessarily.
Does it mean you were wrong? Yes, in at least one way.
Does that mean you will never get it back? Absolutely not.

Losses are an event, yes, but they also subtract from your account. Consider them a cost of doing business as a trader. Brick-and-mortar stores have overhead, but as a trader, the biggest portion of your overhead is the losses you take.

When businesses cut costs, they’re reducing their overhead as much as possible to fatten their profit margins. Do the same with your trading. Reduce your “loss overhead” by accepting a loss quickly and moving on to the next trade.

It’s much more fun to always be adding to your account rather than seeing funds flow out, but as soon as you start viewing trading losses as something impersonal, it’s going to change your perspective in a very helpful way. Rather than fret over them and allow losses to cloud your thinking or alter your mood, viewing them through the proper lens will help you more quickly get them back and then some.

Like it or not, trading is a business. How are you managing yours?

Jeff White
Producer of The Bandit Broadcast

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3 Comments on “How to Think About a Loss”

  1. “Does it mean you were wrong? Yes, in at least one way.”  ..  I have to disagree with this point

    I only consider myself wrong *IF* I don’t follow my system.   loses are part of the system, but that does not mean I was wrong.  

    If anything, maybe my system was wrong (but not me) ..

  2. I’ve gotten pretty good at moving on quickly. Being wrong goes against my internal ego. It does take practice not taking it personally.

  3. Nice post Jeff – one metric I like to look at in my own trading is comparing the size of my biggest loss on the day to my overall PnL on the day. I find that the number of losers I have in any given day doesn’t really matter as long as I keep them all small. The magnitude of my biggest loser, on the other hand, is a pretty accurate predictor of that day’s PnL.   

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