The Problem With Trying to Avoid Losses

The Problem With Trying to Avoid Losses

This is a guest post from Tino @tradersreality. This article originally appeared on tradersreality.com and is reposted here with permission.

 

It goes with out saying, trying to avoid something, usually ends up taking you right in the middle of that which you didn’t want in the first place. How is this relatable to trading?

Let’s consider the following.

You are new to trading, You have followed the various Instagram posters with the fast cars and the watches the clothes and the fine things in life, along with the freedom.

Instantly, you are captured into the vortex of thought that trading will provide these luxuries. All you can see is the money. All you focus on is the money.

Is this wrong?

Yes and No.

For the seasoned trader, all he is attracted to is the process. The idea of making sure his execution and application of his knowledge as a trader is going to expose him to high probability trades and thus make him profitable.
Now a seasoned trader focuses only on one thing.

Longevity.

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The master trader understands that this game is about numbers and awareness to basing trading decisions around the minimal exposure to risk. The master trader has recognized that his success in trading is completely reliant on his ability to make decisions without hesitation. Scenarios and circumstances where the trader is exposed to risk that if he hesitates, can cripple his hard earned capital.

The trader that is quick to address exposure to risk, sure enough stands a greater chance at surviving in this field of speculation.

So what attributes do new traders have that cause them to lose so frequently?
An aversion To losses…

The problem that all new traders have, is they have this set of beliefs that master traders don’t lose. They believe that master traders have this divine ability to foresee a loss, thus never experiencing a loss.

Now we enter into the mind of a new trader that is naïve and dismissive of the seriousness and commitment that becoming a trader involves. Something that I still can’t grasp is how can you allow a trade, to show a loss and not close it, even when you know you should, and you only close it when you have nothing left in your account? It baffles me to this day. I am not proud to say, but I have experienced this many times. I have had the opportunity to close a losing trade, say, when I was down 3% but decided to close it when I was down 30%. What’s happening here is I became so emotionally attached to the idea of “not losing” which in the end cost me more than it should have. Welcome to the world of trading.

Back to my point, the new trader is only focused on the rewards of trading and not the process of developing themselves as a trader. Being results based orientated is the sole reason why traders fail in the beginning.
Lets take the analogy of poker. A winning player is determined on his ability to expose himself to opportunities that have a high risk/return ratio. He understands that a large volume of hands is required in order to beat the game in the long run, based on this players edge he brings to the table. Variance can be in his favor or not.

The same principle applies to a trader. The master trader understands that his edge, when applied optimally, in the long run will improve his chances of increasing his ROI over a large sample size of trades.

The problem with a new trader is they fail to give themselves a chance to succeed because they are motivated by the great expectations of becoming financially independent over night.

The problem all new traders have….

As stated above, the new trader only focuses on the expectation that the entry will be profitable. This will create the thinking process that if their position is in the red, they will hold this position until it returns to positive territory, just so they don’t take a loss.

This is what you call, being married to a trade.

I admit, I have put myself in this situation many times. I have been married to a trade, I have been so committed that I would allow a 50%+ draw down just so I don’t feel the market has “beaten me”. Well it’s safe to say, every account that I had traded with this mentality, sure did turn negative and was eventually depleted.

So the new trader must recognize the importance of having a strategy that they will honor and respect the criteria that the strategy has in place.

Your goal is to protect your account. The master trader focuses on how much he can lose as opposed to how much he can win.

So if you are new to trading, make it your goal to focus exclusively on accepting that it is OK to lose. It is part of the process. There is nothing wrong in a losing trade. If you are feeling down about a loss, then you surely won’t be able to withstand the victories that trading can provide. You have to be able to accept both schools of thought.

Trade well my friends.

Tino

You can follow Tino on twitter at @Tradersreality and visit his website at tradersreality.com.