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October, 201410:58 PM

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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 31 October 2014
    • 27
    • ARG Argo Investments annual general meeting | 4:26 AM
    • BEN Bendigo and Adelaide Bank annual general meeting | 4:27 AM
    • SPO Spotless annual general meeting | 4:28 AM
    • RBA Panel participation by Reserve Bank of Australia (RBA) head of financial stability, Luci Ellis at the Australian Housing and Urban Research Institute panel roundtable | 6:07 AM
    • 28
    • AOFM AOFM to issue $200 million of February 21, 2022 indexed Treasury bonds | 4:05 AM
    • SGP Stockland annual general meeting | 4:26 AM
    • Financial Review's Future Forum Financial Review's Future Forum: The Asian Century, featuring Telstra chief financial officer Andrew Penn, Fortescue Metals chief executive Nev Power and former Australian Ambassador to China Geoff Raby | 4:27 AM
    • WPL WorleyParsons annual general meeting | 4:27 AM
    • WHC Whitehaven Coal annual general meeting | 4:28 AM
    • SGF Challenger annual general meeting | 4:29 AM
    • TAH Tabcorp annual general meeting | 4:29 AM
    • BGA Bega Cheese annual general meeting | 5:13 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 5:16 AM
    • DMP Domino's Pizza annual general meeting | 6:08 AM
    • 29
    • MMS McMillan Shakespeare Group annual general meeting | 2:18 AM
    • QRX QRxPharma annual general meeting | 2:18 AM
    • TTS Tatts annual general meeting | 4:06 AM
    • AOFM AOFM to issue $600 million of April 21, 2029 Treasury bonds | 4:59 AM
    • DXS Dexus Property Group annual general meeting | 5:40 AM
    • AGO Atlas Iron annual general meeting | 5:41 AM
    • JBH JB Hi-Fi annual general meeting | 5:42 AM
    • MOC Mortgage Choice annual general meeting | 6:05 AM
    • NIB nib Holdings annual general meeting | 6:08 AM
    • TPI Transpacific Industries annual general meeting | 6:09 AM
    • SUN Suncorp chief executive Patrick Snowball speaking at American Chamber of Commerce in Australia lunch | 6:09 AM
    • GXL Greencross annual general meeting | 6:46 AM
    • 30
    • IAG IAG annual general meeting | 2:19 AM
    • NAB NAB full year results | 4:23 AM
    • AAD Ardent Leisure annual general meeting | 4:24 AM
    • PAS PAS Group annual general meeting | 4:25 AM
    • FDC Federation Centres annual general meeting | 4:25 AM
    • FLT Flight Centre annual general meeting | 4:26 AM
    • PPT Perpetual annual general meeting | 5:13 AM
    • NCK Nick Scali annual general meeting | 5:18 AM
    • HIA HIA New home sales for September | 5:19 AM
    • AOFM AOFM to issue $500 million of Treasury notes, maturing on February 27, 2015 | 5:19 AM
    • FNP Freedom Foods annual general meeting | 5:19 AM
    • TOL Toll Group investor day | 5:35 AM
    • UGL UGL annual general meeting | 5:42 AM
    • ABS Australian Bureau of Statistics (ABS) international trade price indexes for September quarter | 6:05 AM
    • BTT BT Investment Management full year results | 6:06 AM
    • WES Wesfarmers first quarter sales results | 6:10 AM
    • 31
    • ANZ ANZ full year results | 5:20 AM
    • EGP Echo Entertainment annual general meeting | 5:21 AM
    • ABS ABS producer price indexes for September quarter | 5:22 AM
    • RBA RBA to release financial aggregates for September | 5:22 AM
    • NCM Newcrest Mining annual general meeting | 5:22 AM
    • HIL Hills annual general meeting | 5:23 AM
    • AOFM AOFM to issue $600 million of October 21, 2019 Treasury bonds | 5:23 AM
    • MQG Macquarie Group half year results | 6:09 AM
    • ORG Origin Energy quarterly production report | 6:09 AM

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