“Most Traders I have encountered over the many years of doing this job, have difficulty in separating the reality of a losing trade from the psychological sense of feeling like a loser…”
There are quite a few books written on how to make money in the market. What you don’t see often, however, are books or articles written on how to lose money.
“Cut your losers and let your winners run” is commonsensical advice, but how do you determine when a position is a loser?
Most Traders I have encountered over the many years of doing this job, have difficulty in separating the reality of a losing trade from the psychological sense of feeling like a loser.
At some level, Traders equate losing with being a loser. This frustrates them, depresses them, makes them anxious. In short, it interferes with their future decision-making, because their P&L is a blank check written against their self-esteem. Once a Trader is self-focused and not market-focused, distortions in decision-making are inevitable.
Perhaps as a Trader, you have heard the saying ‘paying for information.’
Well, this is where a Trader can put on a small position to test the market. Then may repeat this process a few times to basically test the underlying demand. Once satisfied, the Trader would then move aggressively with a larger position to make money.
What is clever about this methodology is understanding these losses are part of a grander plan. If done correctly, a Trader is not just losing money. he is paying for information.
For example, if my maximum position size is 10 lots and I buy the highs of a range with 1 lot, expecting a breakout, I am testing the waters. While I am not potentially moving the market, I still have begun a test of my breakout hypothesis. I then watch carefully and wait patiently while observing several of my confluences for confirmation.
How are the other averages behaving at the top ends of their range?
How is the market absorbing the activity of the buyers and sellers?
Like any good Scientist for example, I am gathering data to determine whether or not my hypothesis is supported.
Suppose the breakout does not materialise and the initial move up falls back into the range on some increased selling pressure. I take the loss on my 1 lot but then what happens from there?
The unsuccessful Trader will respond with frustration: “Why do I always get caught buying the highs?” I can’t believe “they” ran the market against me! This market is impossible to trade.” Because of that frustration – and the associated self-focus – the unsuccessful Trader does not take any information away from that trade.
The successful Trader on the other hand, will see the losing 1 lot as part of a greater plan. Had the market broken nicely to the upside, they would have scaled into the long trade and likely made money. If the 1 lot was a loser, they paid to know this is a range-bound market. This may even become a good place for price to reverse and go short to at least the bottom of that range.
Look at it this way. If you put on a high probability trade and the trade fails to make you money, you have just paid for an important piece of information. The market is not behaving as it normally, historically does. If a robust piece of economic news that normally sends the dollar screaming higher fails to budge the currency, you have just acquired a useful bit of info.
There is an underlying lack of demand for dollars. That information might hold far more profit potential than the money lost in the initial trade.
Everett Klipp is a distinguished Trader with a fifty-year track record of trading success on the floor. In addition, he has a mentorship of over 100 Traders.
Speaking of his system of short-term Trading, Klipp said “You have to love to lose money and hate to make money to be successful. It’s against human nature what I teach and practice. You have to overcome your humanness.”
Klipp’s system was quick to take profits (hence the idea of hating to make money), but even quicker to take losses (loving to lose money). Instead of viewing losses as a threat, Klipp treated them as an essential part of trading. Taking a small loss reinforces a Trader’s sense of discipline and control, he believed. Losses are not failures.
So here’s a question any Trader should ask themselves when entering a high probability trade. “What will tell me that my trade is wrong, and how can I use that information to subsequently profit?”
If you’re trading well, there are no losing trades, only trades that make money and trades that give you the information to make money later.