http://downtowntrader.com/learn-to-lose-money-to-make-money/
Unfortunately, it is the sad reality that the majority of people reading this are not profitable traders. If I could single out the most common culprit for sabotaging your trading it would have to be not being able to take a loss. This is especially prevalent amongst new traders, but I’ve seen this single trading mistake cripple even more experienced traders. In fact, I’ve run across countless traders that are generally successful if not for a few outsized losses. The problem is that these outsized losses are what cripple your account and push you into the negative column. You will never be a successful trader, EVER, until you learn how to take a loss.
As humans we have been conditioned to strive for perfection and let’s face it, no one likes being wrong. The problem is that many traders equate a losing trade with making a mistake. This is simply the wrong way to look at it. A trader should judge his trades by grading the process, not the results. There are simply too many unpredictable variables impacting whether a trade is successful or not. Surprise news, an insider liquidating shares to purchase a summer home, or even comments on CNBC are curveballs that could negate even the most perfect of trade setups. Some catalysts are temporary in nature and others have a profound impact on the stock. No one knows exactly how the reaction will play out, so it is usually the best course to exit side left if that is what your trading plan called for and simply chalk off the trade.
Doubling down or holding on to a losing position for fear of taking a loss will eventually lead to your ruin. This will work at times, as stocks will often shake out weak hands and promptly reverse to head higher. However, the problem is that the few times it doesn’t work out will lead to huge losses. Some stocks DO go to zero and stocks dropping over 20% in a day are not really uncommon. The “catching a falling knife” analogy is actually quite appropriate. You can certainly catch a falling knife in your kitchen several times, and probably get pretty proficient in it (if you’re diabolical enough to practice it). However, the few times you screw up can leave you seriously hurt.
Beyond this, stocks don’t always come back and even if they eventually do, you still likely could have been better off looking for a better opportunity. You wouldn’t keep your money in a shoe box so why keep it in a stock that’s going no where. Traders should focus on the process and in striving for perfection in the mechanics of a trade instead of worrying about the results. Make sure you have a plan and execute it flawlessly every time. This means only entering a trade for which you know you have an edge and then exiting at a predetermined price or condition when it goes against you.
If you take your losses religiously and focus all your effort on minimizing the mistakes in your trading process, you will undoubtedly improve as a trader. In fact, it would be damned hard to be a losing trader if you truly embraced this simple rule. Remember that taking a loss doesn’t mean you were wrong if you accounted for that chance in your trading plan. The probabilities simply didn’t work out in your favor.
Good Trading,
Joey
