Do you think about making profits more than about limiting losses? This is typical behavior for traders, who love to dream of profits but really get emotional with losses.
In fact, controlling losses is the real “magic trick” in trading and we explain why the simple rules governing physiological well-being apply to trading as well.
Why Combatting Chips & Losses Are Similar
The evidence was as incontrovertible as it was disheartening. Wherever I looked – there it was. A glance at the mirror, the latest photograph from the family Christmas Party, even my friends were taking note as much as they were having fun making sure that I knew. I was getting the handles.
Contrary to what the name might suggest, I personally think that there is indeed nothing lovely about love handles. For someone as vain as I, this was a startling wake up call. There was no doubt about it – I was getting fat. Too much sitting on my butt, staring at charts on the trading screen, downing countless cups of bad 3-in-1 coffee, munching on the empty calories of Famous Amo’s Chocolate Chip with Macadamia Nut cookies. #noregrets
Fortunately I knew what to do. Forget the idealistic form of my college youth. Forget the muscles built on 100 push-ups, 100 sit-ups and a 10km run per day. I knew that, unlike our buff spider Nenad, I was never a fitness junkie. I also knew better that I did not have the time, nor the motivation (more of the motivation) to follow a serious workout regime. But I could definitely set a much more realistic goal.
I may not be able to quickly lose weight, but I felt confident that I could at least stop myself from growing more horizontally inclined.
The First Steps of my Recovery
I began spending an hour in the gym each day, forced myself to do 50 sit-ups, 50 push-ups, squeezed in a 2.4km run, and cut myself down to just one chocolate chip cookie a day. Sure enough, within 2 weeks, I dropped 5 kilos and the love handles began to recede.
Trading is largely similar. We burn countless hours trying to figure out how to turn $100,000 into $1,000,000, but in the process fail to remember that the very first rule of winning is to simply stop losing. Take a look at any sample size of trading accounts and you will promptly realize that most traders are unsuccessful not because they misread the market, but because they allowed a bad trade to blow up their account.
Controlling Losses is Step 1 in Trading
The single most vital trait for long-term success in this profession is not to bank every pip or to take every set-up, but rather, to control losses. There is always tomorrow, and the markets will never stop offering the chance of a comeback, that is, IF you still have the capital. This is precisely why the road to winning starts with learning to minimize losses. And that means to always have stops. Religiously. Period.
There may be a great deal of times when honouring stops would cost you, as price moves through them only to recover and rally in favour of your initial position. If you cannot accept that fact, you will never succeed as a trader because it’s just a matter of time before that position without a stop-loss moves so violently against you that you lose all profits and equity in a single lethal blowout.
Before you can start getting thin, you must first stop yourself from becoming fatter. Before you can start winning in trading, you must first learn to keep your account at breakeven.
As I always like to say; to be able to trade in itself is a privilege. Sound position and risk management ensures that we preserve that privilege.
Wishing you a long-term, sustained profitability.
“The first rule is not to lose. The second rule is not to forget the first rule.”
– Warren Buffett
With you always,