Losing Traders Continue to Lose Because They Refuse to Take Losses:
It’s ironic that many traders consistently lose money because they refuse to lose. The reality is that losses are a large part of trading. Managing the downside of each and every trade you make is of extreme importance. And if you’re too stubborn to take losses at a reasonable level, then those losses can potentially grow larger and larger until most or all of your initial investment is gone. This lack of discipline can undoubtedly take a massive toll on your trading account. Many of the best traders out there only generate a profit on about 60-70% of their trades, but if those 30-40% of losing trades were enormous losses, then they’d probably be far from profitable. So don’t be stubborn. Have your risk level established before you even enter a trade and stick to it every single time without fail.
When you think about it, there are only five potential results on every trade: 1) large loss, 2) small loss, 3) breakeven, 4) small win, and 5) large win. If you can cut out the large losses, then your odds of being a profitable trader substantially improve. From this perspective, all you have to do is avoid one outcome out of five. It should be easy, shouldn’t it? But in practice, people have a really hard time staying disciplined and sticking to their stops. It takes work to develop and maintain the proper trading mindset, but it’s vital for long-term success in the markets. Many traders agree that way too much time is focused on the potential reward (how high the stock can go up) when the most critical component is the risk (how low the stock can go before you stop out). Ultimately, what they’ve found is that when they primarily focus on their downside risk and stay disciplined with stop losses, they actually make much more money over time. That’s a direct result of eliminating large losses from the equation. Their portfolio balances are also a lot less volatile and steadily grind higher, as opposed to seesawing rapidly back-and-forth (which can be mentally draining as well).
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Thanks for taking the time to write this article! I like your perspective of the 5 potential trade results. Indeed, I think the elimination of #1 (large loss) is a great initial goal. If we can do this, we have certainly boosted our odds. Your mention of stop loss discipline is spot-on; this has been the strategy I’ve recently used for steady, long-term growth.