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The importance of accepting losing trades

  • #1
  • First Post: Dec 23, 2014 2:09pm Dec 23, 2014 2:09pm
My dear friends,

All of us have read once in a while that there were people out there trading without SL. I was one of them. No matter how many advices I received against it, I simply wouldn't use any kind of SL, until I reached a very important conclusion (for me, at least). May this thread help us understand the psychological reasons behind this behaviour, and may the successful No-SL traders present their arguments, as well.

MY PERSONAL OPINION:
My account is marked with remarkable performance followed by margin calls. After a few of these, I started to consider that maybe the fault wasn't on the system I was using. Before that, I did all kind of devilry: Hedging, Martingale, adding to losing positions to try and exit at breakeven - all of that to avoid having a single losing trade.
After realizing that these techniques were only making me waste my money, I finally understood that it was faster, cheaper and easier to simply exit with a small loss.
It sounds quite reasonable, but I had a psychological block against it. I've tried to analyze this and concluded the following:

Reasons why I wouldn't accept a losing trade:

  1. "Price will come back... I just missed the perfect entry point." What if it doesn't? How long will you keep telling this lie to yourself? Isn't it easier and less stressing to reconquer a 1% DD than a 20% one?
  2. "But I followed every single rule of my system..." So what? There is no perfect system. Maybe there is unexpected news moving the market. Exit and prepare to reenter once you get another opportunity.
  3. "I just can't lose all that I have gained today... I won't be able to recover it, London/US is already closing..." Put it mathematically: Would you rather gain 1% or 20%? Obviously, 20%. On the other hand, why in God's name would you prefer to risk losing 20% if you can simply lose 1%? Loss is unavoidable, you can only control how much you're going to lose. And most important of all: a negative day means absolutely nothing. What's stopping you from gaining ten times tomorrow what you lost today?
  4. And the most important thing, at least for me... Setting a stop loss is responsibility. I wasn't able to accept responsibility for my losses and wanted to enter trades free of all kinds of responsibility, "just for a quick scalp". Be advised that quick scalps can turn into margin calls pretty quickly if you're not accepting responsibility for your trades.

My personal conclusions:

  1. You need something to stop you from losing. Be it a hard SL, a mental SL, a gun pointed to your head that shoots after your loss gets bigger than X pips, SOMETHING! Your equity curve's health will be thankful for that...
  2. It's faster, easier and more profitable to just exit with a small loss and forget about it.

Let's talk about it, guys! I'm sure this thread can be very fruitful for everyone. I respect every single trader out there, so even if you state that I said nothing but crap, I'll be very happy to learn from what you have to say.

  • #2
  • Dec 23, 2014 4:13pm Dec 23, 2014 4:13pm
I believe exiting a loss without worrying about it or viewing it negatively is one of the main things that separates a successful trader from an unsuccessful one. The ability to do that and the ability to let winning trades keep on going without premature exits are two of the hardest psychological problems to master in trading.
  • #3
  • Dec 23, 2014 4:35pm Dec 23, 2014 4:35pm
I have traded with a SL from the day I started..... at one stage that annoyed me intensely as more often than not it would get hit but 1 pip or less and then proceed to go to my target shortly thereafter..... I knew someone who traded quite successfully for a long time but ended up with a margin call because he never used stops so whenever I was annoyed that " I would have won if not for my stop" I would remind myself of that.....
at the end of the day I don't think it is possible to win EVERY trade so as long as the loss is set a reasonable level (in my case I risk no more than 1 %) and as long as you have more winners than losers and your winners are bigger than your losers then in my opinion you are on the road to success..... I found it very difficult to accept losses in the beginning but dealing with them is something we all need to learn to do.....
So for me I will always trade with stops and think they are essential....
  • #4
  • Dec 23, 2014 4:37pm Dec 23, 2014 4:37pm
You must learn to NOT LOSE MONEY before you can ever make money! Losses are a part of the game and we will all have trades that don't go our way, but without controlling those losses with SL you have not learned to NOT LOSE MONEY. Once you master that I believe you can then learn to let your winning trades run. I spent a year with only one goal; to never have a losing trade greater than 3% of my account. I didn't care about the wins, just never have a loss above 3%. It taught me discipline and, ironically, I got to trade more because I never blew the account, leaving me spending time to find cash to refund the account.

As far as adding to a losing position or just holding for the sake of hope, it is like the vending machine that takes your change but does not give you your item. You don't add more change. You walk away and find a new machine. If you enter a trade knowing when you will be proved wrong (and you should enter all trades knowing that), don't argue with yourself about being proved wrong. Move on to the next opportunity.

Good Luck to all in their trading journey!
  • #5
  • Edited 5:28pm Dec 23, 2014 4:52pm | Edited 5:28pm
Lovely post WalterWhite

In this game of trading it is critical that you trust your system and not your gut instinct. In a stochastic market where it is impossible to perfectly predict price movement the whole reason for using a system is based on the principle that over the long term there is a probability bias in your favour. You can never predict with certainty when that probability bias will turn in your favour and therefore it is critical that you learn to trust your system. A stop, hedge or other method of protecting yourself against adverse price movements is an essential ingredient of any reliable system. Without it, you are trading blind and face the likely prospect that over the long term you will be defeated by this market.

Holding on unnecessarily to a losing trade locks up your trading capital giving rise to lost opportunity cost. It is during these times you inevitably see other trades that you could have taken if you were not holding on to this darned stubborn trade. This lesson can drag out for extended periods leading to considerable frustration. You might be able to extract yourself from this situation after a period of time with more favourable price moves but it puts unnecessary psychological strain on you. You may have the opinion trading forex that inevitably you will get mean reversion, but this is assuming you can avoid the margin call.

What we also tend to easily forget is that being human we are subject to the vaguaries of the human condition. I wouldn't like to be holding a trade with angina for example. Arising from your condition might be an awful shock leading to acute heart failure if you don't have a stop in place.

When you go against your own rules you might pat yourself on the back and commend yourself that you can read the market better than your system but unfortunately you are only kidding yourself. The mortal trading sin however has been committed in that you have broken your trading discipline and you may as well commence the slow countdown to your imminent doom.

What has helped me personally is that once I commit to a trade, I am locked in to my system rules with no ability for discretion. I liken it to being on a rifle range where I pull the trigger and have no way of retreiving my bullet.

If you trade using gut instinct alone, there is no way that you can reliably test your gut instinct to determine whether that instinct is going to stand the test of time in the market you are trading. Conversely, if you trade according to the rules of your system you can always assess those rules against current market conditions to test whether those rules are still valid and amend them accordingly.

The stop or method to reduce the impact of adverse price movements is your friend. Learn to respect and accept acceptable losses. What you don't want are unacceptable losses as they serve to decimate your trading life. A string of acceptable losses are an indicator that it is time to take stock and closely look at your system to determine whether amendments are required for current market conditions. At least you are still alive to fight another day, so learn from them and accept them. :-)
  • #6
  • Dec 23, 2014 10:22pm Dec 23, 2014 10:22pm
I have a stop set to about 1/3 of my profit target. I trade wth the same $ risk per trade.

It’s not something I obsess over though.

Most of my energy is focused on finding the best setups i.e. the actual startegy.

Acepting losses. Well, if you have a hard stop like I do, you have no choice!

I don’t enjoy having my stops being hit, and admit that I do get a bit more cautious after a few consective losses. But I don’t psychoanalyse the situation.

IMO the main game is getting your strategy right i.e. working out what setups are the best ones, and which ones to avoid, and having some sort of strategy to manage an open position. And this takes time, trial and error, forward testing, back testing, and study ad re-study of countless charts, and 100’s of trading hours. Developing a great strategy is the hard bit. Eventually things become intuitive.
  • #7
  • Dec 24, 2014 7:44pm Dec 24, 2014 7:44pm
Quoting teddybomber
I believe exiting a loss without worrying about it or viewing it negatively is one of the main things that separates a successful trader from an unsuccessful one. The ability to do that and the ability to let winning trades keep on going without premature exits are two of the hardest psychological problems to master in trading.
Aren't these two abilities branches of the same tree? Think about it:
You refuse to exit at a loss because you don't want to lose money. (Even though you're risking losing even more with that behaviour)
You exit a losing trade prematurely because you don't want to lose your small profit, aka, money.
Interesting...

Quoting TessiaFx
I have traded with a SL from the day I started..... at one stage that annoyed me intensely as more often than not it would get hit but 1 pip or less and then proceed to go to my target shortly thereafter..... I knew someone who traded quite successfully for a long time but ended up with a margin call because he never used stops so whenever I was annoyed that " I would have won if not for my stop" I would remind myself of that..... at the end of the day I don't think it is possible to win EVERY trade so as long as the loss is set a reasonable level...
That's the point, exactly! It's absurdly annoying to be stopped and see price go your way in the next candle - but it's better than a margin call... psychologically and mathematically speaking...

Quoting tradin4x
You must learn to NOT LOSE MONEY before you can ever make money! Losses are a part of the game and we will all have trades that don't go our way, but without controlling those losses with SL you have not learned to NOT LOSE MONEY. Once you master that I believe you can then learn to let your winning trades run. I spent a year with only one goal; to never have a losing trade greater than 3% of my account. I didn't care about the wins, just never have a loss above 3%. It taught me discipline and, ironically, I got to trade more because I never blew...
Very interesting comparison with the vending machine! Also, I liked what you said there about not having to spend time/money refunding a blown account if you allow yourself to have losing trades... How ironic is that?
  • #8
  • Dec 24, 2014 7:54pm Dec 24, 2014 7:54pm
While I agree with most in that cutting your losses short and letting profits run are two of the more difficult hurdles to overcome, being able to do so will not make you a profitable trader alone. At some point a trader who lets their profit run has to exit the trade. Mastering the entry and exit (aka timing) is another difficult hurdle to clear - perhaps more difficult than all others.
  • #9
  • Dec 24, 2014 8:05pm Dec 24, 2014 8:05pm
Quoting Copernicus
Lovely post WalterWhite In this game of trading it is critical that you trust your system and not your gut instinct. In a stochastic market where it is impossible to perfectly predict price movement the whole reason for using a system is based on the principle that over the long term there is a probability bias in your favour. You can never predict with certainty when that probability bias will turn in your favour and therefore it is critical that you learn to trust your system. A stop, hedge or other method of protecting yourself against adverse...
Very well spoken!
Allow me to comment that, in my humble and probably stupid opinion, discretion may be necessary with some systems. For example, when you base your decisions in price action. Price action is the reason why human traders still exist, and that's because it can't be taught to a computer. It's not an exact science! Can you say with 100% certainty that a pin bar will cause a reversal? Can you be sure that it won't? What if all of my system's lights are green, telling me to enter after that pin bar, but something intangible, a weird candle pattern, some difficulty to form/maintain that pin bar, something you can't explain to any computer appears? Would you still enter?
You may say that this is just a sign that your system needs additional rules to cover these situations, but I'm quite sure that there are situations which are impossible to quantify and, therefore, impossible to be included in an objective set of rules.
Is that really lack of discipline? I believe that there are things you can't measure with indicators, so maybe; and that's coming from the fingertips of a beginner, so don't take it seriously; there is a need for discretion in trading. But that's just my opinion, I totally respect your point

Merry Christmas!

Quoting SM02
I have a stop set to about 1/3 of my profit target. I trade wth the same $ risk per trade. It’s not something I obsess over though. Most of my energy is focused on finding the best setups i.e. the actual startegy. Acepting losses. Well, if you have a hard stop like I do, you have no choice! I don’t enjoy having my stops being hit, and admit that I do get a bit more cautious after a few consective losses. But I don’t psychoanalyse the situation. IMO the main game is getting your strategy right i.e. working out what setups are the best ones, and which...
Quoting 2+2=4ex
While I agree with most in that cutting your losses short and letting profits run are two of the more difficult hurdles to overcome, being able to do so will not make you a profitable trader alone. At some point a trader who lets their profit run has to exit the trade. Mastering the entry and exit (aka timing) is another difficult hurdle to clear - perhaps more difficult than all others.
You're both perfectly correct! Let me put it this way, if you allow it:

Cutting losses and letting profits run doesn't make you a profitable trader, but not doing these two things will prevent you from becoming one.

The point is, developing a good strategy with fine tuned entries and exits is something that still needs to be done after being able to avoid what we've been discussing. Maybe it can be compared to driving a car: Being able to promptly accelerate and decelerate without hesitation is necessary for driving, but it doesn't make you a good driver.
  • #10
  • Edited 5:28am Dec 25, 2014 5:03am | Edited 5:28am
Quoting WalterWhite
{quote} Allow me to comment that, in my humble and probably stupid opinion, discretion may be necessary with some systems. For example, when you base your decisions in price action. Price action is the reason why human traders still exist, and that's because it can't be taught to a computer. It's not an exact science! Can you say with 100% certainty that a pin bar will cause a reversal? Can you be sure that it won't? What if all of my system's lights are green, telling me to enter after that pin bar, but something intangible, a weird candle pattern,...
I must admit that I have yet to find an EA that can stand the test of time so I see where you are coming from. In the system I use, there is considerable discretion in determining the entry condition as I have yet to find a programmer capable of considering the host of decisions that need to be made in my assessment to replace this important part of trading with an EA. Once the trade has been entered I fortunately have a few tools at my disposal to consistently manage the trade in a more rigurous and less subjective way than through human intervention alone, and that is where the non-discretionary elements of the strategy come into play. Once the trigger is pressed it is very mechanistic.

What however is very important to me is in the analysis of trading techniques and this is where a system or set of rules is very useful in at least defining the parameters within which decisions should be made. With these rules you can therefore determine the boundary constraints of the strategy to assess the merits or issues associated with the system being traded. You can also then pass these rules on to others to at least ensure there is a set of guidelines to follow. Without those rules in place you can never guarantee the consistency of approach required to determine whether your technique or strategy is appropriate to current market conditions.

There may be gifted traders out there that can read the market on gut instinct alone but the ability to transfer this information to others is limited. I can certainly say without a question of doubt that I am not one of those gurus. My only chance is to deploy a rigurous system with fine tuned constraints in this game riddled with chance to hopefully give me a slight edge that can be reproduced on a consistent basis.

I must admit that I have spent the better part of my life purging myself of the instrinsic desire to interfere with a trade based on intuition. There have been many trades I have taken where I could predict the outcome and I am sure there are some aspects of trading such as pattern recognition that seem to occur at the subliminal level however to ensure the consistent application of the strategy, I have had to overcome the desire to interfere. The reason for this is that if I faithfully follow my system rules then when the day comes that conditions change and that system needs tweaking or alteration, I can easily determine the rules that need to be amended as opposed to relying on a memorised trade journal in my brain.

At least with stops in place, these simple rules define parameters within which the system is constrained. Yes, they can be a pain in the neck with the benefit of hindsight but without them, there is a small probability of catastrophic failure. If I had a heart attach at my computer, my dying breath would be the utterrance to my wife.....I love you dear.....and yes...... the current trades are safe........ :-)
  • #11
  • Last Post: Feb 8, 2015 6:32pm Feb 8, 2015 6:32pm
Quoting WalterWhite
My dear friends, All of us have read once in a while that there were people out there trading without SL. I was one of them. No matter how many advices I received against it, I simply wouldn't use any kind of SL, until I reached a very important conclusion (for me, at least). May this thread help us understand the psychological reasons behind this behaviour, and may the successful No-SL traders present their arguments, as well. MY PERSONAL OPINION: My account is marked with remarkable performance followed by margin calls. After a few of these, I...
Great topic that is all too often given only a passing thought or sentence in most of the threads on FF. The need to be right is often more important than making money..
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