If You Can Take Losses, You're Not a Losing Trader

by: Bob Lang
Can you stand the heat when you're put to the fire?  If not, can you exit gracefully without getting hurt too badly?  Certainly one of the keys to trading success is about knowing how/when to cut your losses.  Some traders can execute a plan perfectly on paper... getting in, getting out, position size, money management, etc., yet seem to forget all the rules when it's 'game on'.  Other traders need to be proven 'right' about their trade ideas...regardless of the market or conditions.  These stubborn players don't last too long in the trading game, railbirds until they get their next cash infusion.  Certainly, understanding about losses and coping with them is part of the game.
Sage Advice from a Proven Professional

In Marcel Link's book, High Probability Trading, he notes that it's critical to understand taking losses is not a loser's game....rather it's just part of the game.  Chapter Nine is the most important chapter of the book, about "Exits".  In here, Link states:

A loss is different from losing.  Every trader will have lots of losses, they are part of trading.  Losing, in contrast, is the result of letting little losses become large ones.  Losses are expected at least half the time, but many people think that by taking a loss they are losing, which is simply not the case.  A winning trader is one who knows how to lose.

I cannot emphasize this last point enough.  Look, as a trader... I'm not looking to lose on a position, and neither should you.  But the law of large numbers tells us that perfection is just not possible.  Besides, things happen beyond our control, and we need to be flexible and ready to shift at a moment's notice.  We may get out too soon, but that's ok...we can always get back in later if the setup is still there.

How To Manage Losing Trades

As mentioned above, the law of large numbers makes perfect trading a pipe dream.  Traders face endless setups each day, week, month and year.  And while we don't have a crystal ball, hopefully our systems generate signals that will produce more winners than losers.  Further, the gains from winners should swamp out the losers...so, not only a good win percentage, but letting winners run increases your total return.  The best way to manage the losses when you have them is to dictate when you'll exit...BEFORE you enter a trade.  This is critical as it takes the sell decision out of your hands when the trade is placed. 
You have dictated to the market when you'll say 'uncle'.  Where is this spot?  Hopefully you have a system that takes the stop loss when a pattern has broken, or perhaps it is a time stop.  Whatever the case, the return of capital is vital to lining up for the next trade, which may likely be a big winner.  Hanging on to a losing trade for days is just not productive nor proactive.
Disclosures: None