How to View Trading Losses

By Yvan


One of the hardest things to teach about trading, I have found (anecdotally), is the idea that you can be wrong, that it’s perfectly okay to be wrong, and that a controlled trading loss is actually a good thing.

But, why is that, why do people fear trading losses so much, why do they have trouble embracing trading losses as part and parcel of this business?

In this post, you’ll find out why, and what you can do to reduce that loss aversion bias.

Here’s one of the reasons why people fear trading losses so much: we fear being wrong. In other words, we fear rejection.

See, when you take a trading loss, you lose money, and obviously, that doesn’t feel so good. But psychologically what’s happening is that we take this loss as rejection. In our mind we feel that we’ve been rejected, and no one likes that. It just doesn’t feel good and it automatically has an effect on us, no matter who we are.

What makes it even worse is that sometimes you can have 2-3-4, even 5 trading losses in a row.

If every time this happens, in your mind you feel like you are personally being rejected, then yes, you will have a fear of losses, you will hesitate, you will question your decisions, you will question your trading plan and your strategy.

The only way to overcome that fear is to mentally step away from it and to recognize it for what it really is.

You have to understand and recognize that a loss is not personal. The market is not saying “No” to you as a person. It’s not even rejecting you, it’s simply not accepting your trade at this moment. In other words, it’s not accepting your business proposal, at this time. But if you’re persistent and try again, eventually it will.

Let’s look at an analogy. Let’s say that you have a metal detector and you enjoy walking on the beach looking for small treasures. In about an hour’s time, you may dig 20 different holes, only to find a piece of trash every time.

But occasionally you’ll stumble across something valuable and rare such as a coin or a piece of jewelry. Now let me ask you this. Would you feel rejected, every time you found trash, instead of treasure?

No, right? You would simply move on to the next hole and not give it a second thought. You would gladly spend hours tossing away trash, just to find one piece of treasure. Because that’s what this treasure hunting activity is all about–you dig, you find trash, you move on.

And you do that time and again.

If you’re lucky, sometimes you find coins here and there. And sometimes if you get even luckier, you’ll find pieces of jewelry or watches that cost perhaps thousands of dollars making it all worth it.

Now let’s take that analogy and apply it to trading. Say you place a trade and the market tells you “No” by handing you a trading loss.

Do you take it personally?

No. If you frame it differently, it’s just a rusty bottle…. you toss it aside and move on.

The next trade you place, there too, the market says “No.”

Do you take it personally?

No, it’s just a piece of metal debris… you toss it aside and move on.

The next trade, the market hands you an even bigger trading loss than what you expected because of an overnight gap in price or something like that.

Do you take it personally?

No, it’s just a tin can and you simply cut your finger on it. You wrap a bandaid around that sucker and move on.

You see, when you realize that a loss is not personal and that it’s just part and parcel of this business, you can then mentally step away from it and look at it for what it is. At that point, you will see that trading is really is just a treasure hunt.

And as long as you keep trading and keep your size small so that one loss or a series of losses don’t have the power to cause you to blow up, you will continue to find treasures here and there.

Yes, you will have to dig through dirt. Yes, you will find garbage. But eventually, you’ll stumble upon treasure, and consistently so.

So, do this little cognitive reframing, keep your mind stable, and you will see that a controlled loss is really no big of a deal… and you may even come to enjoy taking them.

I hope this was helpful.

 

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Other Articles to Help You Deal with Trading Losses:

Why Trading Losses Are Painful, And What You Can Do About It

How to Take a Trading Loss Like A Pro

Back To Basics. How To Go through Losses Without Losing Your Mind

 

Memorable Lines From This Post

One of the hardest things to teach about trading ... is the idea that you can be wrong, that it’s perfectly okay to be wrong, and that a controlled trading loss is actually a good thing.

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Understand and recognize that a loss is not personal. The market is not saying “No” to you as a person. It’s not even rejecting you, it’s simply not accepting your trade at this moment.

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Trading is really is just a treasure hunt.

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As long as you keep trading and keep your size small so that one loss or a series of losses don’t have the power to cause you to blow up, you will continue to find treasures here and there.

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