Losing is an integral part of winning, especially in trading. To become a skilled and well-rounded trader, it’s crucial not only to master the strategies for trading but also to understand how to handle losses effectively.
You won’t achieve long-term success in trading if you fail to grasp the significance of managing losses and learning from them.
Prepare Your Mind for Managing Losses
New traders often go to great lengths to avoid losses, which is a natural instinct. Human nature drives us to steer clear of losses, but in trading, this instinct can be harmful and lead to significant damage—potentially even wiping out your account if you let it.
Losses are an unavoidable part of trading. If they weren’t, everyone would be a billionaire, which is clearly unrealistic. The truth is that losing trades are inevitable. If you don’t take small, calculated losses, you’re setting yourself up for larger, potentially devastating ones. You can postpone losses, but you can never completely avoid them—and often, the longer you delay, the bigger the eventual loss.
As a trader, you should view losses as the ‘cost’ of doing business. Every business has expenses—whether it’s a restaurant with costs like food, labor, rent, and utilities, or any other enterprise. If your revenue exceeds your costs, you make a profit; if not, you incur losses.
In trading, your costs come from losing trades, broker fees, commissions, and possibly equipment expenses. By shifting your perspective and seeing losses as a standard cost of trading, you’ll move from trying to avoid losses to focusing on how to manage them effectively.
The Importance of Learning to Lose Properly
Learning to lose properly in trading means controlling your losses within a predefined limit, known as the trade’s ‘R value.’ The best part is that you determine how much you’re willing to risk on any given trade, which gives you the power to eliminate surprises and the emotions that come with unexpected losses.
Traders often feel frustration and disappointment after losses for two main reasons:
- They expect to win on a trade but end up losing.
- They lose more money than they were emotionally prepared to handle.
Fortunately, both of these issues can be easily addressed if you’re honest with yourself and realistic about trading. First, you need to accept that any trade can be a losing one, and there’s no way to know with certainty which trades will win and which will lose. Therefore, you should never expect to win a trade, no matter how promising it seems.
For this same reason, you should only risk an amount of money on each trade that you’re completely comfortable with losing. Since it’s impossible to predict which trades will be successful, you must avoid risking more than you’re emotionally or mentally prepared to lose. If you ignore this and lose more than you’re comfortable with, the emotional consequences—and any poor decisions made afterward—are entirely your responsibility.
The key takeaway is that to lose properly, you need to adjust your mind-set. Stop trying to avoid losses, and start accepting them as part of the process. Focus on managing losses instead of expecting to win every trade. Accept that you won’t win every time, and since you don’t know which trades will win or lose, never risk more than you’re willing to lose on any single trade.
How to Lose Properly
Now that you’ve accepted the reality of trading—a random distribution of winning and losing trades—let’s break down how you can lose properly in 5 simple steps:
Step 1:
The first step to losing properly is acknowledging that losing trades are inevitable. Once you embrace this, you can shift your focus to minimizing losses, rather than avoiding them altogether.
Step 2:
Determine the specific dollar amount (or equivalent currency) you are comfortable risking on any trade. Risk is measured in actual monetary terms, not in pips or percentages.
Step 3:
Now it’s time to calculate your position size for the trade. Start by identifying the optimal location for your stop loss, based on the surrounding market structure, such as key price levels or price action. Once your stop loss is set, determine how many lots to trade to ensure your risk doesn’t exceed the predetermined R value. Make sure your stop loss is placed logically, not driven by greed or emotion.
Step 4:
Set the trade and walk away. After you’ve configured all the parameters—entry, exit (stop loss and profit target), and position size—it’s crucial to leave the trade alone. One of the key aspects of learning to lose properly is not interfering with your trades once they’re live. For most traders, especially beginners, stepping away after setting up a trade is the best approach.
Step 5:
Don’t try to avoid a loss. This is where trading psychology can trip you up. Never make the mistake of moving your stop loss further away as the price nears it. Remember, losses are inevitable, and trying to “avoid” them will only cultivate bad habits that could lead to catastrophic losses later. Stick to your strategy, maintain discipline, and accept that the market will sometimes stop you out for your planned 1R loss. A successful trade exit can either be a winner or a planned loser. Taking a loss as planned is still a successful outcome, as success comes from adhering to your strategy and remaining disciplined.
Final Thoughts on Losing Properly
Don’t disregard this lesson—it could be the most critical mistake you make as a trader. To succeed, you must set aside your ego and the desire to win every trade. Both will only lead to unnecessary losses, and I know you don’t want that.
Trading is challenging for most because they struggle to accept the fact that losses are inevitable. Many traders try to avoid losing trades, and in doing so, they create a “monster”—bad trading habits that eventually lead to devastating, account-wiping losses.
The key to winning in trading is controlling and managing your losses. By doing so, your winners can easily outpace your losers, leaving you with a profit. Just like running a business, you need to ensure that your revenue exceeds your costs to stay profitable.