How to Think About a Loss
We all lose here and there, it’s just part of trading. You can’t avoid it, but that isn’t the issue. Where many traders struggle is how to handle a loss gracefully.
Instead if equating a trading loss with personal failure, shift your mentality for what a loss means.
Does it mean you’re stupid? Not necessarily.
Does it mean you were wrong? Yes, in at least one way.
Does that mean you will never get it back? Absolutely not.
Losses are an event, yes, but it’s also a distribution from your account. Consider them a cost of doing business as a trader. Brick-and-mortar stores have overhead, but as a trader, the biggest portion of your overhead is the losses you take.
When businesses cut costs, they’re reducing their overhead as much as possible to fatten their profit margins. Do the same with your trading. Reduce your ‘loss overhead’ by accepting a loss quickly and moving on to the next trade.
It’s much more fun to always be adding to your account rather than seeing funds flow out, but as soon as you start viewing trading losses as something impersonal, it’s going to change your perspective in a very helpful way. Rather than fret over them and allow losses to cloud your thinking or alter your mood, viewing them through the proper lens will help you more quickly get them back and then some.
Like it or not, trading is a business…how are you managing yours?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
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Mark | Oct 27, 2011 | Reply
Very interesting! Thanks.
Companies with higher overhead don’t necessarily make less net profit. Often the opposite is true. If there is no gain without risk in the stock market, I wonder if traders with higher “overhead” sometimes make more net profit, and those who are scared of losses make less?
Rean Andre' Da Costa | Oct 27, 2011 | Reply
Your post could not have been more on cue!! Iv always had a problem finding the right perspective when dealing with small losses and the last two times i didn’t put a stoploss, the stock just gained crazy momentum in the opposite direction. Wiped out weeks of gains! I was just taking a break from trading to get back mentally in the game over the last few days but tomorrow im gonna consciously keep in mind what you said about “The Cost of doing business”. Thanks Jeff!
Anonymous | Oct 27, 2011 | Reply
I would agree that traders who have higher overhead most likely have bigger swings, but not necessarily are more profitable.
You’re absolutely right that risk must be taken to get paid in the market, I am simply making the point that taking smaller losses should aid net profitability by cutting down on what’s given back to the market.
Anonymous | Oct 27, 2011 | Reply
Thank you Rean, I’m glad it was timely! And I applaud you for taking a break until your mind is clear again, if more traders would do that when they get in a funk they’d increase their survival rate in this biz. Appreciate you reading and thanks as well for sharing your comments.
Vinicius | Oct 27, 2011 | Reply
That was great for me too. I´m astounished as how much of our work is about ourselves. How much is about controlling emotions by controlling your mind. And I´m not saying here in a spiritual buddist way… I´m saying in a pratical manner. The technique used to trade is the less important part of the recipe because even if you have the most profitable method it will only work when used and to be used your mind has to be in the right place.
Thank you very much for this new perspective… it will help a lot! BTW is helping alreary!
p.s. sorry… my english is bad but I hope you could understand.
Anonymous | Oct 27, 2011 | Reply
Vinicius, thanks for sharing your comments on this, I’m glad it’s helpful! I totally agree on your point of how much of trading is about ourselves. Few ever stop to realize that, but it’s actually the best starting point for a new trader to determine (1) who they are, and (2) how they should trade keeping that in mind.
Hope to see you back around soon!