How well we cope with our losses defines us as traders

Apr 2 • Between the lines • 3791 Views • Comments Off on How well we cope with our losses defines us as traders

Let’s be honest none of us actually enjoy the feeling of losing at anything we put our effort into, whether it be a competitive sport, a game, or ‘betting’ on the markets. However, one thing is for certain in trading, or betting on the markets, is that we will lose and we’ll lose quite often. So therefore (after our period of apprenticeship) we have to, very quickly thereafter, develop what we term “coping mechanisms” for the inevitable losses we’ll have to endure.

In search of the no loss system

In our early days, once we’ve discovered this industry, we often obsess over attempting to find the perfect trading system and in our naïveté we believe that system should be one that has close on zero losses. We may spend months at first, even over a year, searching for that special ‘no loss’ system when the reality is that no such trading system exists. It’s possibly the biggest bridge we cross when we finally accept that losses are an inevitable part of doing business in this business.

“I can accept losses it’s mistakes that I can’t tolerate“

Planning the trades and trading the plan is a mantra we’ll see repeated in many blogs and forums and in our various columns, but how many of us actually work to a plan, how many of us have committed our trading journal to a trading plan? If we had we will surely limit the potential mistakes we make, in fact there should be no mistakes if we stick to our plan.

It’s important to emphasise that losses are not mistakes; we can only enter when our high probability set up occurs and then manage the trade and our expectations accordingly. We cannot predict our losses but we can define an edge based on the probability of a distribution between losses and gains.

Positions that become losses are inevitable, statistically it will happen

As we begin to accept what we can and what we can’t control in our trading we begin to recognise the importance of probabilities in our trading. No matter how effective and efficient our high probability set up is we simply can’t predict, with any degree of certainty, what the breakdown between our losers and winners will be.

We could accept the duality of the best and worst case scenarios; we could accept that the best and worst we can predict to still be profitable is a 50:50 breakdown between our winners and losers if our winning pip gain is greater than our losses. One thing that is certain is that if we take a more actuarial and forensic attitude towards our trading, list everything in our plan and begin to look at it in terms of probabilities, we’ll be on the right path to success.

Far too many traders are obsessed with wins and losses when their real focus should be on profit

It reads like such a simple statement but it’s true that far too many of us obsess over win loss ratios as opposed to what we all enter this competitive and challenging arena for; to make money. Regular readers of our columns will have noticed how we tend to use a 50:50 win loss ratio in many of our examples and we do this for a reason. The majority of new traders coming into this industry would find it hard to accept that a win loss ratio that low could be profitable and yet this base level of returns in in fact the perfect base from which to build a perfectly adequate trading method and overall strategy.

Losses are the only element in which a trader can have full control

It can’t be stressed enough that in trading we should concentrate on and double up our efforts on the elements within our control. We can control the risk per trade we decide upon. We can control our risk in our trade (once live) by way of stops, trailing stops or otherwise. We can control our emotions and we can control the entry. Obviously we can’t control the market so we need to simply let the market surrender to us the profits and losses available and not stress with regards to what might have been.