LEARNING TO LOVE TO TAKE A LOSS

I realized early on in my trading career that one of the most common characteristics in almost all successful traders I’d met was they are all very goal-oriented.

In fact, I’m not sure if you realize it or not, but that’s when people are at their best. People perform at their best when they have a goal clearly in their mind. That is the way the human mind works.  When we have a goal clearly in our minds, our subconscious works very hard at helping us to achieve that goal. It does it quite automatically without having to fight using willpower. (This is something you’ll learn much more about when you start learning more about psycho-cybernetics.)

But there is one big catch.  You may have a goal clearly in mind, but it must have three important characteristics:

1)  Your goal must be realistic.
2)  Your goal must be attainable.
3)  Your goal must be measurable.

Your goal must be realistic.  This means that your goal has to be something that is within your capabilities.  Sure, it may be possible to make a million dollars your first year trading, but it’s probably not very realistic because it isn’t within your capabilities yet. Your goal must be attainable.  This is similar to a goal being realistic.  Again, your goal must be within your capabilities.  So, an example might be if you are trying to average $250-$500 a day with your trading from off-the-floor.  You have a much better chance of being able to reach that goal versus the goal to make a million dollars this year.  Don’t get me wrong, if you are doing very well with your current goal, there’s no reason you can’t raise it somewhat. But you must start with a goal that is attainable and then you can build on it.  I highly suggest starting with a small goal and moving up from there.

Your goal must be measurable. This is one I see people making a mistake about all the time.  Everybody wants to get rich or make a fortune in the market. That seems to be everybody’s goal.  But you know what, that isn’t really a goal. A goal must be measurable. You must be able to know when you’re far away, close, and when you’ve achieved your particular goal.  If it’s not measurable, you won’t know when you’re there, and even worse, you won’t know how close you are to reaching your goal.

When I first started working on the trading floor, I spent lots of time talking to different traders about how they were able to make money in the markets. It seemed liked the more I talked to different traders, the more their answers all sounded the same.  Realistic, measurable goal-setting is extremely important to being successful in trading.  In fact, just trying to make money each day (without a goal) is a road to failure.

The more successful the trader I talked to, the more they would stress how important setting goals was to their success.  But you even need to take it a step further.  Not only do you need realistic, measurable goals, but you need to visualize yourself reaching those goals on a daily basis. I remember some advice I’d gotten from a very successful off-the-floor trader who’s since past away, “Just as important as setting specific goals, you must visualize yourself successfully reaching those goals each and everyday. If you can’t see yourself in your mind’s eye as a success, there is no chance you will become successful. It just won’t happen!”

We will talk more about visualization techniques in a little while. But I hope you understand how important it is to have specific goals so you can see how your progress is going and quickly determine if things need to be changed. I will tell you from first hand experience that when I’m trading well and making good money, it’s definitely because I’m totally focused on my specific goals.  And, on the other hand, when I’m trading poorly, it’s because I’ve lost sight of my goal and I’m not seeing it clearly like I should be.

And you know what?  It definitely shows up in my trading results every time. The more you practice realistic goal-setting, the easier it will get for you to do on a consistent basis. As a side note, I happen to know someone who teaches people to day trade the S&P Futures.  One of the lessons he teaches his students is to make $250 a day for 20 straight days in a row. You might say $250 is not a lot of money to make in a single day in the S&P futures, but the whole point is for these students to learn to have realistic, attainable goals that they can reach. Once they reach the attainable goal, they can strive to have a somewhat larger goal. Just like anything, you’ll want to start small and slowly make your goal larger.

By the way, most of his students are successful at getting through the 20 days of making $250 each day.  Once they’ve gotten that goal, they are ready to move up to a slightly larger goal, of course, as long as it’s still measurable and realistic.  Just like anything, it gets easier with repetition and practice.

This is something you’ll hear successful floor traders say all the time.  If you’re going to be a successful trader, either on or off-the-floor, you will have to learn to love taking a loss. Basically, what that means is it does not bother you to have a losing trade. Don’t get me wrong, you’re not going to be happy to have a losing trade, but you should be happy to be out of the market when the trade no longer represents a profitable opportunity.

Most people who learn this do it the hard way.  They end up losing all their money before they realize how important it is to love taking a loss. Instead of ignoring the fact that they have a losing trade (like most people do), successful traders confront the possibility of being wrong, and thus, when the time comes to take a loss, they do it without hesitation. I think the reason that so many people have trouble getting out of their losing trades is because they think the losing trade is a reflection of themself. Nothing could be further from the truth. Your losing trades do not diminish you as a person. You are not your losing trades. You are also not your winning trades either. They are simply by-products of the business that you’re in.

Losing trades are part of trading.  The most successful traders in the world have losing trades each and every day. They do not get caught up in thinking that the losing trade is part of them. They realize it’s just part of trading, and the sooner they get rid of the losing trade, the faster they can look for the next opportunity to find a winning trade.  This is easier said than done, but nevertheless, it’s still the reality of how to make money trading.

I have a friend who’s been an S&P floor trader for over 15 years. He is probably one of the 5 best traders in the S&P pit. He’s also probably one of the 25 best floor traders in the world. The house he lives in has 14 bedrooms and a 6-car garage. So, obviously, he does pretty well with his trading.

He has literally thousands and thousand of dollars in losing trades almost each day. He probably has more money in losing trades each day than most people make in a month. Obviously, he has many thousands of dollars in winning trades also. The point is he has learned to realize that having losing trades is part of the game, and he knows the quicker he can get rid of the losing trades, the sooner he can find some winning trades. It will be the same for you, but only on a smaller scale.
One thing you’ll need to learn is why it’s so important to confront the possibility of a losing trade. If you don’t, you will generate fear and end of up with the very situation you are trying to avoid. When you can learn to understand this concept, only then can you prevent your losing trades from becoming unmanageable and, quite possibly, from wiping out your entire account.

Realistic Goals

Mark Douglas, author of The Disciplined Trader states, “Execute your losing trades immediately upon perception that they exist.  When losses are predefined and executed without hesitation, there is nothing to consider, weigh, or judge and consequently nothing to tempt yourself with. There will be no threat of allowing yourself the possibility of ultimate disaster. If you find yourself considering, weighing, or judging, then you are either not predefining what a loss is or you are not executing them immediately upon perception, in which case, if you don’t and it turns out to be profitable, you are reinforcing an inappropriate behavior that will inevitably lead to disaster. Or, if you don’t and the loss worsens, you will create a negative cycle of pain, that once started will be difficult to stop.”

He goes on to say, “Keep in mind that fear is really the only thing that keeps us from learning anything new. You can’t learn anything new about the nature of the market’s behavior if you are afraid of what you may do or can’t do that is not in your best interests. By predefining and cutting your losses short, you are making yourself available to learn the best possible way to let your profits grow.”

If you can change what these losses mean to you and realize that getting out of a losing trade as soon as you define it as such, you will be able to release yourself from the stress that those losing trades probably cause you now.  This is why learning to love taking a loss is so important. It puts you in a much better position to take the winning trades.

Related Posts : Emotion, Rules of The Game