How to Take a Trading Loss

I hate being wrong on a trade. But if you are going to trade you are going to take some losses.

Seeing your premium erode in a trade, or worse, seeing all the profits you previously gained AND your premium erode, can be a real drag. Your beliefs and perceptions about a loss are crucial. Recall that trading is 80 percent mental. Do you take it personally? That is, do you personally feel you are a failure?

There are a plethora of trading and investing books out there on how to win money from the markets. And most work at least some of the time. However, it appears that some top traders disagree with other top traders on how to win profits in the markets.

Some traders like diversifying their portfolio (John Templeton), and some like it concentrated (Warren Buffet). Some like technical analysis, some don’t. Remember someone is on the losing side of every winning trade. If everyone agreed on how to trade to win, who would be left to take the other side of the trade?

Recently, I read the book What I learned Losing a Million Dollars. At first glance, most think I don’t need any advice there; I already know how to lose. The book confirms what I and many pro traders have come to believe: What you feel about the loss is critical to your longevity in the markets. More importantly, while the pros can’t all agree on how to pick winners, they all agree on how to properly see losses.

The authors review the five stages people go through in their mental process when taking a loss:

1. Denial — “There is no way this is happening to me; the market will turn around.”
2. Anger — “This market/president/fed chair is pissing me off.”
3. Bargaining — “If you just get me back to down a little, I’ll get out.”
4. Depression — “Oh, sh**. Here we go again. I just can’t do this anymore.”
5. Acceptance — “That was a bad trade. Let’s reload and bag another winner.”

The first four stages can last and recycle repeatedly until you come to the conclusion of acceptance. And when a trader can’t escape the first four stages, they are doomed.

When you look at a losing trade as a personal failure, the cycle will continue.  When you see a losing trade as a learning experience and an incorrect analysis that led to the loss, you’re on your way to acceptance.

How do you feel about misplacing your car keys, glasses, or cell phone? When a losing trade feels about as bad as misplacing your cell phone, which I presume you wouldn’t take personally as a failure, acceptance is near. Attempt to see your losses as external to your personal abilities, as they truly are.

Can you honestly say, “I made a mistake in this trade, the market is always right, and it’s time to get out of this trade?” A good mental process here would lead you to think something along these lines.: “While this trade was incorrect, I am a good trader, and probability is in my favor in the long run.”

Losses are inevitable in a market where anything can happen. Complete acceptance of a loss is paramount. I recall what a famous military leader shouted when apparently retreating from the enemy. “I’m not retreating, I’m advancing in a different direction.”

Finally, since losses are inevitable for a trader, it is more important now than ever to do so within a trading business. I’ve written an e-book about how to get started with this, and you can get a copy HERE. To trade outside a business structure is simply amateur.

Enuf said.