Re-Framing Loss
Money Flying Coin Away Hand  - mohamed_hassan / Pixabay

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Losing trades are a part of trading. Let’s just get that out of the way up front. Absolutely everyone has individual losing trades at some point, even if it’s just on one portion of a larger, overall-winning position. But I believe it’s how traders frame their losses, that causes a lot of trouble.

  • If a losing trade informs you of a weakness in your system/approach that you are then able to correct, is it a loss?
  • If you take a loss in order to get out of the way when market conditions suddenly changed and you don’t understand why, is it a loss?
  • If you have an idea for a new setup and in exploring it you take losing trades, are they losses?

In all of these cases, I would argue that no they are absolutely not losses. They are business expenses. And there are many, many other examples that would fall into this category. The point here, is that trading requires losses because new information is always becoming available, that wasn’t just a moment earlier. It also requires research (it’s why we are Trading Research Group after all!) and as any scientist will tell you, research is messy.

I had a turning point/epiphany around this a number of years ago, in a prior “business life” when trading was only a very part-time focus of mine. I was a full time affiliate marketer for many years, and in the beginning when I was trying to figure out what worked and what didn’t, I was getting very frustrated and overall feeling pretty down about the whole thing. I would want to test a marketing campaign to promote a product or service as their affiliate, and I used paid traffic to do this (think Google Adwords, Facebook Ads, etc.) This meant that in order to see if something was going to work and generate any revenue, I had to spend money up front. It was an “instant loss” right out of the gate. Most campaigns didn’t work, which meant I “lost” that money. But some did, and some of those made a lot more money back. But still I struggled with coping with the up-front “losses” I kept experiencing.

And then one day the light bulb went off. If someone offered to tell me ahead of time, which campaigns would make money and which would not, for a fee… would I pay it? Oh hell yes I would!! And this was my realization. I wasn’t losing money on failed campaigns. I was buying data on what worked, and what didn’t. And this completely changed things for me. Instantly I stopped being bothered by the costs associated with my business. They were a means to an end, and the faster I could just plow through them, the better.

This is not to say that I just spent money wildly with abandon! I didn’t have infinite pockets, and as a trader you and I certainly don’t either. So we must be smart about what ideas we choose to spend money on, in order to find out if they will work or not. And hopefully with repeated experiences, we begin to recognize up front which ideas have a better chance of working, vs. others.

This is why practice is so critical in trading, and truly nothing but “seat time” – actually being in the markets and trading – can really give it to you. Books can’t, seminars can’t, heck even TRG can’t! We can point you in some worthwhile directions and help you to understand what the data you’ve purchased from the market is telling you. But in the end you just have to get out there, and buy some data yourself.

But don’t call them losses unless you truly learn nothing from them. And after all, if you’re trading and learning nothing, you’re just donating your money to the other participants who have been learning from their spend.

Until next time, good trading!

Jonathan van Clute
Community Manager, Trading Research Group

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