All Financial Wisdom
Trading Strategy: When Learning to Lose is Part of Success
Although it sounds a bit strange, many traders end up losing money with their trading precisely because of their uncontrollable fear and aversion to losses. It does not enter into a traditional mental scheme that when trading in the markets there may be negative trades. It seems that we either have all positive trades, or we aren’t good traders. Nothing could be further from the truth.
Losses are part of the variable cost of the trading business. Is it true that you can not understand a business without its costs of structure, salaries, office supplies, rents, supplies, etc? For in trading you have to understand the losses as part of the costs associated with the trading activity – without giving them (losses) more significance than they deserve.
However, we must understand that the human being has essentially an important aversion to lose. We do not like risk, and we prefer not to expose ourselves to losing $100, although assuming that risk can lead us to win $200. It should be said, however, that each individual has his own limits in this regard, but there are many experiments that support this natural aversion to loss.
That is why trading is considered in many ways an activity that leads us to experience behaviors and attitudes that have nothing to do with our habitual behavior. The chip change I have often talked about has a lot to do with it. You have to reprogram beliefs and get rid of paradigms because the only thing they are going to do is block our trading. And that is neither immediate nor simple.
Detachment from money
One of those concepts that is most important in trading is what is known as detachment from money (or the result). You have to be able to think of points, pips or ticks instead of euros, dollars or pounds. The natural tendency of a novice trader is to translate everything into money. How much money have I won? How much money have I lost?
It is necessary to understand the trading activity as a simple work of accumulating points in our favor, being aware at all times that we will have several trades in which the points will remain. If we translate everything into money, the losses will be a much more difficult burden to bear.
Finally, you have to be able to understand that having a percentage of positive trades even below 50%, our activity as traders can already be profitable globally. This is very important to work that detachment. Negative trades can be even the majority of our trades .
Let me illustrate with an example. Imagine that you trade with a stop loss of $100, but your target for each trade is $300. Even if 2 out of every 3 trades you make are negative, your trading will ultimately be a winner, since you will have lost $200 in those 2 negative trades, But the positive will have reported a profit of $300, giving an overall result of $100 in your favor.
Therefore, it must be assumed that negative trades are part of any trading system, and you do not have to be emotionally conditioned by them, because that is when everything falters. Imagine that by having the 2 previous negative trades, you stop taking the third, which is precisely the one that was going to solve the day. You can not allow losses to condition your trading. Understand them as part of your system, and do not stray from your trading plan driven by emotions.