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Professional Trader: Never Lose Sleep On A Trading Loss Again

Professional Trader: Never Lose Sleep On A Trading Loss Again

By Expert Panel 20.05.2013


By Dr Alexander Elder, SpikeTrade.com

Most traders focus only on winning, on making the big trade. It is much safer to think first about losing and how to manage and control losses. When you learn to ski, one of the first things your instructor will teach you is how to fall safely. Not knowing how to lose safely can result in catastrophic losses.

Bad losses create fear and then traders fail to take new attractive trades. A successful trader must learn to lose properly and learn to love taking small losses. Just like falls on ski slopes, this is a normal part of the game.

The following is a good sequence of steps:

1. Eliminate disastrous losses
2. Learn to lose properly
3. Learn when not to trade (look for higher probability trades)
4. Learn to ride winners

Once you master items one and two, you can focus on items three and four.

To achieve long-term success you must develop techniques for setting risk limits and dealing with inevitable losses. We must learn to embrace losses so that we can win.

Disastrous losses become the undoing of many traders. The first step towards success consists of learning to avoid them. Traders continue suffering because they’re unwilling to accept a loss.

A trader needs to recognize when a trade is not behaving the way it should and what is the maximum loss one can ever take. At some point we have to accept a loss – unwillingness to do so will affect the psyche and lead to more fear, preventing us from becoming a successful trader.

I used to battle against losses, believing something was wrong with my system if I had to take a loss. I kept tweaking my system and never leaving it alone. I would take a loss one day, then trade differently the next day. I felt like a dog chasing its tail.

A conversation with one of my company managers made me realize that I needed to handle my trading the same way as my business.

A manager in my company noticed that I was upset and asked whether I was upset with him. I replied that I was irritated by trading losses that day. He thought it was strange, because I never got upset over losses on individual jobs that happen from time to time. I replied that I don’t expect us to make money on every single job and it’s a cost of doing business in this industry to incur occasional job losses. What mattered most was how we managed a group of jobs over time. I did not expect to make money each week or every month. My manager politely asked, what the difference was between that and trading.

The only difference was that in business I didn’t have five screens flashing green and red every minute of the day, showing how much I was making or losing at any given moment. I was OK knowing that I would not make money on every individual job, yet I was letting trading losses take me on an emotional roller coaster.

Think about it for a minute. Is it so terrible to take a loss on a few positions? I am sure if I had to run my business with a ticker tape in front of me, it would be just as difficult to deal with the daily ups and downs. I see my profits and losses on a monthly basis in business, but in trading I get to see them for each position minute by minute.

I had to train my mind to deal with trading losses just like with business losses. Losses are a normal cost of doing business and nothing more than a businessman’s risk. What’s important is the profitability over time and not the profitability of any one position. I needed to focus on the total result, not the individual result.

That brief conversation with a manger who was not even a trader helped me recognize that I was allowing individual losses to take up much of my focus and cause me emotional pain. I was getting more upset over a $200 trading loss than a $10,000 project loss in the company. I was running a multimillion dollar company with fewer worries or emotions than my small trading account at that time. As my manager walked out my office, I could not help but laugh at this paradox.

My mindset changed after I realized that a loss on an individual trade was no different than a business loss on an individual project. I began to manage my trading like I was managing my business. Trades were individual projects. I would lose money on some and make money on others. My primary focus shifted to the overall process rather than each individual trade. In the end what mattered was that I was making more than I was losing over a set number of trades.

Becoming a realist and accepting that some trades are not going to work helps me keep my emotions in check. I even removed trade balances from my screens in order to keep my focus on the process rather than each individual trade.

Click on the links below to read other articles from this week's newsletter

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2. 18 Share Tips - 20 May 2013: 18 Share Tips to BUY, SELL & HOLD from...

3. Many Income Stocks Are Overvalued - So Where To For Yield?: They provide low-cost, index-like returns...

4. The Best Way To Protect Your Portfolio From Losses: Be wary of investment options that promise too...

5. Trade Forex On Herd Instinct: Being a contrarian may enable you to reap...

6. The Frankenstein Economy: From the great recession of 2008 has emerged...

7. Professional Trader: How To Take Trading Losses: I began to manage my trading like I was...

8. Top 10 shorted stocks: Each day we feature the top 10 shorted stocks...

9. Stocks on a roll: ASX rolling 52-week highs for the previous...

10. Stocks on the slide: ASX rolling 52-week lows for the previous...

 

Dr. Alexander Elder is a private trader and a teacher of traders based in New York City. He is the author of several international best-sellers, including Trading for a Living, and Come into My Trading Room. SpikeTrade.com is an international website that runs a weekly competition for the best trades in the US stock market.  The winner of each weekly round writes a report “How I Won My Gold." For more information and a trial membership please visit www.spiketrade.com



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WHAT’S ON THIS WEEK

week 5 September 2014
    • 01
    • RP Data RP Data Rismark Home Value Index for August | 1:01 AM
    • TD Securities TD Securities-Melbourne Institute inflation gauge for August | 6:08 AM
    • PMI Australian Industry Group performance of manufacturing (PMI) index for August | 6:10 AM
    • ABS Australian Bureau of Statistics (ABS) business indicators for June quarter | 6:11 AM
    • RBA Reserve Bank of Australia (RBA) index of commodity prices for August | 6:11 AM
    • 02
    • ABS ABS Building approvals for July | 2:17 AM
    • Dun and Bradstreet Dun and Bradstreet business expectations survey | 4:59 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 5:41 AM
    • ABS ABS Balance of Payments and International Investment Position for the June quarter | 6:08 AM
    • RBA Reserve Bank of Australia monthly board meeting and interest rate decision | 6:08 AM
    • ANZ ANZ chairman David Gonski to address an Australian British Chamber of Commerce lunch | 6:09 AM
    • ABS ABS government finance statistics for June quarter | 6:09 AM
    • 03
    • Employee Fraud and Theft seminar Employee Fraud and Theft seminar: Jeff Smith and Stuart Snaith from Regents Risk Advisory talking about how companies can prevent, investigate and recover losses from fraud | 2:18 AM
    • RBA RBA governor Glenn Stevens delivers keynote address at CEDA event | 2:18 AM
    • Paydirt Africa Down Under conference Paydirt Africa Down Under conference, day one of three | 2:19 AM
    • AOFM AOFM to issue $600 million of April 21, 2026 Treasury bonds | 2:23 AM
    • ABS ABS national accounts, including gross domestic product for June quarter | 4:58 AM
    • PSI Australian Industry Group Australian Performance of Services Index (PSI) for August | 5:41 AM
    • Kim Williams Book launch by former New Corp Australia CEO Kim Williams | 6:46 AM
    • 04
    • ABS ABS overseas arrivals and departures for July | 5:35 AM
    • ABS ABS retail trade for July | 5:40 AM
    • AOFM AOFM to issue $500 million of Treasury notes, maturing on January 23, 2015 | 5:42 AM
    • ABS ABS international trade in goods and services for July | 5:42 AM
    • Paydirt Africa Down Under conference Paydirt Africa Down Under conference, day two of three | 6:05 AM
    • CEDA CEDA Economic Prosperity event, speakers include Flinders University vice chancellor Michael Barber and UK Parliamentary Office of Science and Technology director Chris Tyler | 6:05 AM
    • 05
    • PCI Australian Industry Group/Housing Industry Association performance of construction index (PCI) for August | 6:06 AM
    • Paydirt Africa Down Under conference Paydirt Africa Down Under conference, day three of three | 6:07 AM
    • AOFM AOFM to issue $1.5 billion of October 21, 2019 Treasury bonds | 6:10 AM

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Featured Comment

The housing sector has cooled slightly this year from a strong base. But the outlook remains positive, with interest rates expected to remain on hold this year and probably well into 2015. The risks are on the upside, with housing potentially doing better

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