Losses are Part of Successful Trading
Traders learn to take punches, just as boxers do. But they do it in a way that doesn’t knock them out. Limited losses are part of a successful trading strategy.
By Vikram Rangala
Wednesday, May 10, 2017 - 00:00
When a boxer steps into the ring, you don’t expect to hear “Why are you punching me? How dare you! This is an outrage!”
Taking punches is part of boxing. Successful boxers learn to take punches. And they win.
When you’re looking for a new job, you expect some rejections. It’s part of the job hunt. You don’t expect everyone to hire you, qualified or not.
“Can’t work a computer? You’ll pick it up. Welcome to Google!”
“You faint at the sight of blood? You’ll get over it. Let’s do your first operation, Doctor!” No, we don’t expect things like that.
In most areas of life, we expect challenges and setbacks. But we don’t let setbacks keep us from going after goals that matter.
We seek out new relationships even if we’ve been rejected in the past. We get back in the gym even if we’ve skipped for a few weeks (or months). Being perfect isn’t a prerequisite for anything, including trading.
Traders learn to take punches, too. But they do it in a way that doesn’t knock them out. Limited losses are part of every winning strategy.
The strategy wins because you keep the losses smaller than the profits. If you have more money coming in than going out, you’re a profitable business.
If that sounds simple, it is. In fact, trading success mostly comes down to a few simple truths.
The first simple truth is, you don’t have to be right about the market’s direction all or even most of the time. In fact, you can be right less than half of the time—many professional traders are 40-percenters. And they admit it proudly, because they understand that being right is not what matters.
Some of the best traders see the markets like an ATM. An ATM that acts a little flaky and sometimes doesn’t give out money, but overall, is fairly consistent.
Other traders treat losses as a necessary business expense, like the cost of lighting and air-conditioning your restaurant—even when you don’t have customers.
The simple truth that may be hardest to believe is this: losses are a necessary part of a winning strategy, a necessary part of trading.
You’re probably thinking, “Can’t I become a successful trader without having to go through the negative emotion of losses?” After all, we don’t say you can’t be a good driver unless you’ve had a few crashes.
Losses help you learn about the markets and about yourself. Right after a loss, you have what some call a “teachable moment.” Ideas that were abstract suddenly become understandable on a personal level.
The thing is, you can have a teachable moment with a $20 loss just as easily as with a loss that wipes out your account or confidence—or both.
Excerpted from the upcoming ebook, How to Take Losses Like a Winner, available soon at no cost on Nadex.com.
This information has been prepared by Nadex, a trading name of North American Derivatives Exchange, Inc., prepared by independent third parties contracted by Nadex or reproduced form third party news agencies. In addition to the disclaimer below, the material on this page does not contain an offer of, or solicitation for, a transaction in any financial instrument. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.