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Losing Trades: A Trader's Greatest Tool

Scott Redler
May 13, 2010, 10:46 AM
By: Gregg Riek

Ever feel like this guy when trading? Taking losses can be painful and suffocating or they can be beneficial and enlightening. They can be emotional roller coasters that lead to blow-ups or they can be unemotional steps towards longevity in the markets. There are only two ways to view a losing trade: As an emotional loss or an unemotional loss. In a perfect world, we as traders will always take unemotional losses. These are the losses where we know that we executed according to plan and the probabilities of the trade were in our favor but it just didn’t play out in our direction in this particular event, but over time it will make us money. But we don’t live in a perfect world and we as traders will take emotional losses (even experienced traders from time to time). These are the most important losses and the only losses we can learn from. What causes a trader to become emotional about a losing trade? Simple: The trader made a mistake and is aware that this mistake caused a losing trade. The more times we as traders make this same mistake, the more emotional we become with each losing trade. My mentor, a great trader, once asked me a very simple, yet powerful question that changed my career:

“How long will you continue to do the same action over and over that causes you pain?”

Take a moment to read that question again before reading on. Now ask yourself that question. How many times will you knowingly make that same mistake? You will continue to feel that pain and emotional loser until you decide enough is enough, look at yourself in the mirror, and decide to soul search to find that emotional trigger that causes you to make that mistake. A mistake can only be corrected if you search for its root, make yourself aware of what sparks that emotion, have 100% self-awareness at all times, and the discipline to control yourself when you feel that emotion trigger. This very difficult task is why most fail in this business. Failing traders do not have the time, energy, or honesty needed to dig deep within themselves and discover who they truly are. We are human and we will always have emotions. In the trading world, traders don’t need to become emotionless robots (it’s impossible and you’ll never reach that goal). Traders need to honestly evaluate themselves when they feel an emotional loser, find their mistake and figure out what emotion caused that mistake. Every trader will have only a handful of mistakes that tend to repeat themselves over and over. Find yours, control them, and elevate yourself to the next level.