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Loss trades are a Guarantee

One of the realities of trading and investing in the share market is that we WILL suffer losses. Not every trade we place will make a profit, and many will actually be losers. It is this fact that we have to come to grips with and be able to fully acknowledge and understand to be successful in this business.

Every trading strategy or system, regardless of its rationale or method for engaging the market, will incur losing trades. The number of losing trades will be expressed as a percentage or a win:loss ratio. Some strategies may have a high percentage of winning trades (and thus fewer losing trades), but the winning trades may only be relatively small in dollar terms. Other strategies may have a higher number of losing trades, but the winning trades will be relatively large in dollar terms.

It is learning how to deal with the losing trades, and more importantly still, strings of losing trades (often referred to as a drawdown) that is critical to long term success in the share market. How we handle individual losses and drawdowns will also provide us with some critical insights into our own personalities, trading mindset and skill level.

Learning how to lose becomes an integral part of our trading and investing persona. It is obviously much easier to deal with losses when we are trading a strategy that has demonstrated long term performance, and can provide us with the details of ‘typical’ losses, and ‘typical’ drawdown’s based on historically tested and live trading results. This allows us to be prepared for the losses when they come.

The old saying “when you lose, don’t lose the lesson” is an important part of our self analysis and self understanding. The pain of losing can be dealt with by either sweeping it under the carpet and trying to ignore it, or embracing it as a valuable learning tool. If we are prepared to see losing in this way, it makes us more likely to be winners in the long run. If we are going to lose, and we can openly accept that we will, we can turn the loss into a valuable gain by learning something from it, whatever it may be. It may be about position sizing, it may be about discipline, it may be about entry or exit rules, or a myriad of other things. The important thing is that a loss is only a total loss if we don’t learn something from it!

The way we deal with winning and losing has a profound impact on us at many levels. It is easy to stay where a loss leaves us so that we become stuck in the negatives where everything seems bad and as though nothing works.

But, we don’t have to get stuck: we can choose to change. We can make the choice to learn and grow from our losses and turn every losing situation into a valuable learning experience. It is when we don’t seize the learning opportunity that losing hurts the most.

But, learning is at its hardest during these periods because we have to do things that, to most of us, are not natural. It is not easy to be positive and upbeat when we are losing. It is difficult to control our emotions when we feel beaten. It is hard to get back up and keep going when we are being continually knocked back down again. It takes discipline to keep on applying the rules of our trading plan when we are in a string of losing trades or drawdown. We can, in fact, learn more from our losing trades and experiences than from our winning ones, but we have to be prepared to seek out the lesson and turn it into a valuable learning tool.


  • David says:

    Yes Gary – the ‘deep’ psychology is perhaps the toughest nut to crack when trading. I heard the term ‘closing the door behind your past trades’ recently and it helped me with what you are describing.

  • John Edwards says:

    It’s a major psychological test when one’s portfolio suffers a significant drawdown while or immediately after it was established.

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