Wednesday, September 27, 2006

Trading to Win Vs. Trading to Not Lose

Suppose I offer you a sure $500 or the choice of flipping a coin. If the coin lands on heads, you'll get $1000. If the coin lands on tails, you'll receive nothing. Would you take the guaranteed $500, or would you flip the coin?

Most people, given the opportunity for a sure thing, will take it.

Now, however, suppose I confront you with a certain *loss* of $500. The alternative is that you can flip a coin. If it lands on heads, you lose nothing. If it lands on tails, however, you lose $1000. Would you take the guaranteed loss of $500, or would you flip the coin?

Interestingly, in that scenario, a significant number of people will flip the coin. We tend to be more risk-seeking when we deal with losses than when we are faced with gains.

Suppose we are into a trade and can take a sure point out the S&P eminis in a short-term trade. Do we "take what the market gives us"? Suppose the market moves four ticks against us. Do we hold the loss in hopes of coming back to breakeven?

There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain--particularly once they have already "booked" that gain mentally. If I'm expecting a bonus from my employer, I'll be happy when I receive the paycheck--but I'll be much more upset if I find out the bonus has been rescinded.

When we enter a trade, we expect to be paid out. Mentally, we book a potential profit. When a loss materializes, it is the unexpected event--and we respond more strongly to the unexpected than to the familiar.

What is the solution to this dilemma? The answer, surprisingly, is to book losses before they occur.

It's human nature to not want to think about such unpleasant things as losses. But by knowing our maximum possible loss in advance and by mentally rehearsing what we'll do on those occasions when the loss occurs, we normalize the losing process. That divests it of its emotional grip.

We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor.

And, if you're trading well, maybe that losing trade will offer you a fresh perspective about how the market is trading: an insight that can make you money the next time around. Then it's not a loss. It's information that you've paid for.


yinTrader said...

Hi Brett
We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor. Unquote

This is in essence what I am striving for, to enter a trade with the probability in my favour so that my win/loss ratio will be 60:40 level.

Losing is inevitable but winning consistently should be our goal.

My thinking.

Brett Steenbarger, Ph.D. said...


And if we can learn from the losses, they become a path toward winning.


Bob said...

Brett, thanks for posting "Trading to Win Vs. Trading to Not Lose". Are there additional books/papers that discuss this subjest matter more indepth? Any recommendations?


Brett Steenbarger, Ph.D. said...

Hi Bob,

Thanks for your interest. I do have articles on my personal site that pertain to this topic (, and my first book (The Psychology of Trading) has material that is relevant as well. I found that people were interested in the how-to aspects of changing their internal programming, so I included two self-help manuals as chapters in my new book (Enhancing Trader Performance) that will be out late in October. Feel free to email me with specific questions.


Krasimir said...

Hi Brett,

Thank you for touching this topic. Kahnemann and Tversky Prospect Theory goes in detail about what you mention in your post.

As you advice, I always mental practice worse case scenario before trading begins so that I do not distort market information.


TradeR:R said...

Very good post. I have been pursuing this idea from a similar angle by making every effort to not think about my profit or loss while I'm in a trade. My goal is to manage each trade effectively and according to plan, and I find that keeping any part of my attention on the proffit/loss of a trade increases my emotional attachment to the price movement - and thus decreases my ability to manage the trade according to my trade plan.

There are two times I find it helpful to think about the profit/loss of a trade:

1) Before the trade when I'm determining my stop/price target and running risk/reward scenarios.

2) After the trade when I'm closing the position out in my trade journal and analysing what I did right/wrong.

Ultimately I want to win... but I've re-defined "winning" as being an effective manager of trades. I know through my trade statistics that this leads to positive returns, but another pay off is the lessoning of emotional stress while I'm working (trading is work afterall).


Brett Steenbarger, Ph.D. said...

Hi TradeR:R,

You make an excellent point: winning is a process--effectively defining and managing trades--not an outcome. The outcomes follow when you perform the processes expertly. Thanks for the observation; I'll check out your blog.


Krasimir said...

Nice comment, TradeR:R


Manish Chauhan said...


I have learned a lot from you , and from your last comment on this article , I have learned one of the most important things in trading today .

Thanks for that .

Can you tell me why do you say that "Its never possible to eliminate loss from trading" , I understand this myself , but what is the reasoning or research behind it ?

Can you share your thoughts on this topic ?


Brett Steenbarger, Ph.D. said...

Hi Manish,

There is always a certain amount of uncertainty built into markets and a certain amount of fallibility built into humans. Until those unhappy realities cease to be operative, losses will be inevitable in trading. What we can control is the magnitude of those losses and the probability of sustaining them over time.


Manish Chauhan said...


Thanks for the reply. I thought there is some kind of statistical research behind this subject , which you might be aware of . I got you point anyways ..

I am sure it will take years to develop those skills and attitude towards trading successfully .

I was down everymonth for last 12 months in my trading , but this month i was not down (not up too) .. It was breakeven .

I have controlled my trading and emotions to great extent this time , I will do better in coming months . I am not going to waste all that hard work :)