Losing is part of trading
We have grown up with the idea that losses should be avoided at all costs. Losing is seen as a sign of weakness and failure is not an option.
In the financial sector, in particular, losers are looked down upon and there is hardly any room for a second chance. Winning is the most important thing.
However, the reality of trading and investing (and actually all of life) is that losing is actually good for you. It is the only way to grow and move forward.
By learning from your mistakes, you can progress and develop in a way that (if all goes well!) leaves lasting lessons that you can derive tremendous value from.
When it comes to trading and investing you simply have to get used to losing.
I’ll explain why …
Losing is inevitable
The number of trades you will make and the countless different scenarios in which you will make those trades will never be the same. Every trade is unique.
The price action will be different, the news that comes out on any given day will be different, the assets you trade will be stronger or weaker at different levels, and your thinking will probably not be consistent either. Just to name a few things that make every trade unique.
Because of all these factors, you can never get it right 100% of the time. Even a 70% win rate is absurdly high.
You have to move the goalposts to what your expectations are in relation to the traditional meaning of “success” in the trading and investing game.
The best traders in the world also lose
Losing trades is an essential part of your job as a day trader. Whether you are a novice or experienced trader; you lose a lot of trades. There will even be periods when you lose more trades than you win.
But the best traders in the world also lose a lot and will also have multiple times in their career where they lose more than they win.
The differentiator here is the reaction to lose. Statistically, we are all going to lose and not just once or twice. You will even experience a losing streak with multiple losers in a row at certain times. Everyone will have to deal with this sooner or later.
Your reaction to these things is what ultimately defines your trading career. Knowing what to expect along these lines can help keep all losses in perspective.
Furthermore, you don’t actually have to win more than 50% of your trades to be profitable. Depending on your average risk to reward ratio, you can be profitable with a win rate of only 35%!
Knowing what not to do
While it is helpful to know how many losses to expect, there is another benefit of losing… The value of knowing what not to do in the future.
See, there are a whole host of different approaches to trading and investing. Techniques, strategies, opinions. They are all different and they all have their own pitfalls, drawbacks, and weaknesses.
Losing actually helps us figure out where we could go wrong again in the future and then understand how to avoid making the same mistake again. Experience is something that cannot be learned in trading and investing. You only get that by doing a lot.
The most important knowledge about trading and investing that I have gained in recent years has mainly to do with what not to do.
For example, knowing when not to trade, when to leave my charts alone for a while so as not to get crazy or impatient, or little things like knowing when not to increase my target.
Knowing what not to do only comes with experience and that is usually the experience of losing.
So if you’re at a loss, don’t fall into the trap of thinking it’s a negative moment. These are the times when the men get separated from the boys and they largely determine whether you become successful or blow your account.
Learn from your mistakes
Not all losses come from mistakes. You will also be stuck on trades that you have executed completely according to your plan and rules. Bad luck is also part of trading and investing. You just have to get rid of these losers.
What matters are the losses due to mistakes that you make yourself. So the unnecessary losers. By converting these losses into learning moments, you turn them into something positive.
Turning our traditional view of losses upside down is difficult. We have been conditioned to associate success with winning. Getting rid of that feeling takes time.
Fortunately, learning from our mistakes is also in our DNA. The first time you burn your mouth with a cup of hot coffee is also a learning moment.
With trading and investing it is a bit more complicated and you will therefore have to put in more effort.
The reason why you should keep track of all your trades in a trading journal is that that way you can analyze all your data. And when you have all the data from both your winners and your losers you will start to see patterns. That way you can learn from your mistakes and know what steps to take in future scenarios.
If you make a mistake that causes you to lose a trade and you recognize that mistake afterwards, you get super valuable knowledge. Remember what I said about experience?
It is the only thing that cannot be learned. It is the most valuable weapon in your trading arsenal.
The overlap with psychology
Part of this all has to do with the psychology that is so important to trading because it’s up to you not to let losses affect you too negatively.
Learn from it, analyze your mistakes, and adjust your approach. By doing this, you turn something that is seen as negative into something that makes your success possible.
Trading and investing can be difficult to start and sustain because of the requirement to learn to lose. In any case, my losers have taught me a lot more than all my winning trades.
Without those losses, I would never have become a winning trader and yes I still make mistakes that I learn from every day.