Let’s face it, we all hate to have losing trades. Whether we realize it or not, losing trades are necessary in order for us to grow as traders. Not being able to take a loss or having a fear of losing will keep you from ever making progress. Most importantly, when you have a trading loss, you have the opportunity to refine your trading ability and reduce anxiety as you continue to trade.
Starting out, many traders will paper trade. This is a great way to get a feel for your methodology and how to manage trades without any emotion getting in the way, but as soon as you put real money on, things change. What is changing is emotion now plays a role in your decision making. Second guessing, fear of losing or fear of missing out now interfere with your thinking. Suddenly taking pain in a trade is more noticeable.
In order to get better as a trader, taking a loss has to be comfortable. How does a trader achieve this? Simply by learning how to size positions strategically. For example, let’s say your methodology is pointing to an emerging long setup but it is within the context of generally bearish conditions. Let’s say your max position size is 3 lots. The question is, should you take 3 lots in this situation? If you answered yes, then you need to seriously consider our training programs.
Since the general conditions are bearish, you reduce risk and anxiety by being more conservative. You take 1 lot. If the position gets stopped out, you lose on your smallest size. You should not really care. If the position works out, you may have the opportunity to add and win on a larger position.
When a trader has no sense of position sizing or any way to define a specific process to decide how much to put on, they usually put on an amount that is uncomfortable psychologically. This is what leads to fear of losing and results in exiting a trade too early. This also creates more anxiety and is more likely to cause a trader to hesitate upon trade entry.
If you are afraid of losing, most likely it’s because you are too big and have no sense of how to read your general conditions. Of course being too big means taking losses that are psychologically painful, which will create all kinds of mental obstacles in your trading. This means you are making it that much harder for yourself to win.
When you know how to size appropriately to maximize favorable conditions while minimizing risks during less favorable conditions, you put yourself in a position to let winners run. This will not happen when you focus on “not losing” all the time. Losses also provide an opportunity to refine your trading skills as well since they force you to question your thought process at the time of trade entry.
Trading is truly a game of psychology, mostly you against your own. Embracing losses, as long as they are within proportion (2%) is healthy and will help you grow once you understand how to use them as learning opportunities. Having the ability to recognize this requires an open mind and capital that you are not dependent on. To really get a handle of this type of thinking process, it really helps to have a mentor or training program to learn from. Contact SMB to learn more.
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Marc Principato, CMT,
*No Relevant Positions
