I have yet to meet a trader who has made money on 100% of his or her trades. We recognize that losing in the stock market is part of trading, understanding that the stock market can not be predicted with complete certainty. Despite this admission, most people still get very frustrated with losing and often turn away from the market when it happens.
“I’ve missed more than 9000 shots in my career, I’ve lost almost 300 games. 26 times I have been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
This quote from Michael Jordan demonstrates the importance of losing. Losing teaches us those things that make us better. Being wrong is an important step in learning to be right.
Stock traders can take a loss and learn from it or let it build up bad habits. Unfortunately, most aspiring traders find it too easy to take the path toward bad habits because of the strong emotional attachment we have to money. It is easy to focus on the pain of losing and then work to avoid that pain in the future.
What does this process lead to? The next time the trader is faced with taking a necessary loss they are likely to hang on to the trade. They avoid pain by breaking their rules on limiting the size of the loss. The small loser can easily become a big loser, wiping out the gains made over a number of successful trades.
This is the financial punishment that comes from not controlling the size of a loss but there is a much more damaging effect that comes from letting a small loser turn in to a big loser. When you hang on to a loser for a long time you are also tying up a lot of emotional capital. That brings on healthy impairing stress and reinforces the pain avoidance response. It puts the trader in to a downward spiral toward ultimate failure.
Losing teaches you a lesson; it is a sort of tuition paid to the stock market. If you do not learn from the loss then you have wasted the investment you have made in your education.
The difference between winning traders and those who fail is their response to losing money. Good traders realize that losing on a trade is part of a process and not a single event. You can reverse a loss, you can only take the experience forward with you. It is up to you whether you choose to do that in a positive or destructive way.
There are way too many people trying to become traders for it to be easy. There is a lot of competition for trading success because it is such a great way to create wealth. The adversity that comes from learning how to trade is what makes a good trader great.
This is why you must take losing in a positive way. A trader who studies their losses and learns from them will be stronger and better in the future. The trader who recognizes the difference between a good loss and a bad one will be able to avoid taking the bad losses in the future.
Do not expect to ever stop making mistakes. During the Advanced Trading Class that I taught this past week, I made a trade that was a mistake. I rushed the trade out of the fear of missing it and did not recognize that some of my rules were being broken on the trade. This became clear when studying the trade later, allowing me to put processes in place to limit this kind of mistake in the future. This is happening to me after trading for over 20 years, so it can easily happen to someone who is just beginning as a trader.
Do not expect to be right all of the time. Success is about what you do when you are wrong, how you handle a loss. If the market tells you that your trading idea is wrong, listen and react accordingly. Usually, the best way to deal with being wrong is locking in the loss and moving on. However, before moving on, make sure you learn the lesson that the market has given you.