Tuesday, May 19, 2009

How To Lose Money The Right Way

So much of trading success comes from learning how to lose the right way. If many of the traders I work with followed a few basic guidelines about losing well, it would aid their performance immeasurably:

1) Never lose so much on a single trade that you can't come back and be green for the morning or afternoon;

2) Never lose so much in the morning that you can't battle back and be green for the day;

3) Never lose so much in a day that you can't rally and finish the week green;

4) Never lose so much in a week that you can't have a profitable month;

5) Never lose so much in a month that you can't make money for the year.

Psychologically, it's healthy to experience defeat and then overcome it. It strengthens you to battle back and win. If you lose the wrong way--by taking so much risk that you can't come back for the day, week, month, or year--you rob yourself of the victory that could be yours by going from red to green.

Sound risk management is the cornerstone of a healthy trading psychology.


Matthew C. said...

Really sound and important advice. This is really THE key to success in trading once you have a demonstrable edge -- don't blow yourself up!

Charting said...

Well Said! I have found that the consistent use of Stop-Losses Assists in Capping Losses Quickly & Forcibly Taking Profits to Avoid The Losses Written About Above. Keep Up the Good Work!

Charting said...

Well Said! I Have Found That Stop-Loss Orders Are Key in Capping Small Losses Quickly Before They Spiral Out of Control & In Forciably Taking Profits on Winning Positions. For Me-Stop-Losses Are A Key Tool in Sticking Within The Guidelines Above. Keep Up the Good Work!

Matthew C. said...

I agree with Charting about forcibly taking profits.

Gangineni Dhananjhay said...

This post goes straight to my heart. I find some times I feel like a winner even if I lose because of planned and deliberate trades. As mentioned elsewhere in the blog if I write down four components

1.The entry
2. The Target
3.The Exit
4.Position Size

It gives me clarity. Losing intelligently, plan fully,with the ability to extract information from the losing trade if properly designed will be the first priority of a developing trader like myself. Unforced losses, Unplanned trades affect my psyche more than loss per se.

E-Mini Player said...

Couldn't agree more. I can't imagine entering a trade without a stop-loss!

E said...

100% in agreement with this philosophy.

I remember, however, Denis Waitley making a point of teaching our mind through positive self-talk.

With due respect, "Always make sure all of my trades in the morning allow me to be profitable for the day" or some other similar description seems to be a better way to give our mind a positive focus and goal.

The intent of your post is exceptional, sometimes it's the little details that kill us.

Great post, we all need to be reminded of it often.