The Intelligent Loser

This thread is all about losing and I hope what I and other traders write here will help some people learn to embrace losing and reach their goal of being consistently profitable, that much sooner. You need 11 vouches to post here, until then, please absorb and learn.

Forums and web sites across the Internet are all focused on winning in trading. Whilst we all seek ultimately to be profitable, embedded in the process of reaching those net profits, are losses.

The inexperienced poke fun at those who lose a trade and the losing trader reports their losing trade as a great failure on their part. Self-proclaimed trading gurus will only speak about how they are right and look for opportunities to tell other traders how 'they are wrong'.

In his book “Technical Analysis of the Financial Markets”, John Murphy explains that professional traders on average, lose about 60% of their trades. So they win just 40% and yet are profitable. These win/loss figures will of course differ dramatically for every trader and the edges they trade with. So why do so many unprofitable traders expect to produce so much better results than the worlds' best traders who make a fortune?

Many people who are in the early stages of their trading careers are hell-bent on ‘being right’ as opposed to being consistently profitable. Advice from more seasoned traders about accepting losses is often ignored as the newcomer 'thinks they know better'. They search in vain for ‘The System’ that will help them win all their trades and quickly abandon any edge they try that encounters a string of losses. “I lost 3 trades in a row trading like that – it’s a useless system” are typical rookie remarks that I used to make myself.

Traders must learn to embrace their losses as a part of their business and not as a personal failure. We must accept that we will often be proven wrong by the market. I win and lose trades all the time but the important thing for me is the net profit. Again, the same principle applies in every business and trading MUST be approached as a business. How many sales professionals convert 100% of prospects into clients?

When I 'catch myself' trying to be right, and perhaps deviating from my trading plan, I have a good talk with myself and get myself back on track.

The are 1000s of edges that can make a trader profitable on all time frames, if they trade well. But EVERY one of those edges involves taking responsible losses and treating those losses as an integral and normal part of a trading business.

Unfortunately, few traders are aware of the above when they start out and find it very difficult to truly accept being wrong and losing. So like I and so many others have, they travel the grueling journey of learning the hard way.

Too many people are trading to be right, instead of trading to be profitable.

Stop trying so hard to be right and clever with analysis.
Stop trying to prove to others how you 'knew' where price was going.

Only then can any struggle you are experiencing, be allowed to diminish.

Rob

I have written a lot about losing and not wanting to be right, in other places around the net. I used to be a writer/publisher by profession, and later a communication management consultant in corporate business in many countries, so I enjoy writing and I do a lot of it in sport also (not just in trading).

But aside from that, every time I write about 'losing' in attempt to help others, I am also re-enforcing those beliefs within myself. We are all only human and even the best traders in the world will slip up and need help staying on track.

So writing about losing is a form of self-therapy for me, whilst at the same time, hopefully helping others too.

Rob

If you don't know Marty Schwartz, he spent a number of years in what he felt was a dead-end job as a financial analyst. Finally he quit the comfort of the corporate cotton wool to become a full-time trader.

When asked; “what is the most money you have made in one day?” he replied; “several million”. At one point in the early 1980’s, he was making $70,000 per day.

Listen to this interview with Marty in 1999 and hear what he says about losing.

NOTE: This audio file will only open if you have RealPlayer installed. You can get it free here

Rob

If there is one book that can help you begin to understand the concept of losing and many other misunderstood aspects of trading, it's Trading in the Zone by Mark Douglas.

Buy it and never stop reading it.

Rob

the idea is to lose small and win big. how you do it is up to you.

many little wins and big losses
many little losses and big wins

in the end if your book remains positive then ur defintiely doing something right

Almost everyone begins their trading life believing they can predict where the market will go next. Most will live with that belief until they give up.

The world is full of carpenters, managers, shop keepers, web developers, CEOs and laborers, etc, who believe they know where the markets will go, whether they are traders or not.

Most traders spend most of their time trying to find an edge that works, when all the time they have seen an endless array of edges (that work) which they dismiss as useless, when the only thing which is not working properly (as a trader should) is themselves.

Trading is not really about prediction or being right or wrong. It's about how much are you willing to risk to find out, because we will never know before hand, where the market will go. No matter how smart we think we might be. As Andrew Menaker puts it; "trading is not a business of predicting, it is a business that involves hypothesizing and risk management".

But most traders remain in the world of prediction as opposed to risk management, and in fact, people who have a general 'know-it-all' attitude in life will struggle more than most in their trading effort as they will by nature find it extremely difficult to accept losses and the fact that they will be wrong much of the time.

Take time to study the work of Mark Douglas, Brett Steenbarger and Andrew Menaker and discover what professional traders are actually focusing on as opposed to what other novices are focusing on.

As with everything in life, learn from the best ...not from beginners.

It's common for traders (particularly young ones) to associate thrills and excitement with the assumption of risk.

When traders take too much risk, they experience profits and losses that are very large relative to their account size and some traders get-off on such swings. They would feel similar at Vegas, doing a sky-dive, skiing at 100mph, etc. These traders link RISK with EXCITEMENT, when in fact, good risk management in trading is not at all about excitement or bravery.

Most who trade like this do not trade for a living; and will never trade for a living if they don't change. And EVERYONE can change if they make the effort and want to learn.

Inevitably, the law of averages catches up with these gamblers as they eventually go through a series of losing trades for days or weeks. Their high leverage works against them and they blow up.

Traders become so convinced that a falling market will turn around and so they hold a position well beyond the original stop-loss point. They could not accept the original planned loss. They had not truly accepted the risk, because if you accept risk, you are ready to accept the consequences. If you are afraid of those consequences, you have not accepted the risk.

Perhaps the trader in that falling market had been on a winning streak which they didn't want to end. So a loss was something they would strive to avoid (loss aversion).

As long as they remain in the trade, they could HOPE that their streak would remain intact but of course such thinking is not in line with intelligent trading. However I, and probably every trader out there has experienced this. The important thing is that we learn from these errors and learn how to NOT repeat them.

We need to learn to embrace the small losses. It is the only way to avoid the league of large losses doing what it loves to do ...annihilate accounts.