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Losing to Win

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You must first learn how to become a "professional loser" if you want to become a successful trader.

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My whole life, I have been very involved in sports. Ice hockey, soccer, golf, and tennis are the sports I love to compete in. While playing hockey at a high level, I learned how to win consistently. There were always teams in the league that would win consistently and others that would lose consistently. When we would play a team that had a bad record, sometimes the other team would be leading the game for a while, but I never worried. It was almost like we could be down by a few goals, but we knew we were going to win in the end. This was because of our positive attitude, which came from our rock-solid confidence. Sure enough, no matter what the score was during much of the game, we would come back and win most games.

The winning attitude almost always beats the losing attitude. The winning teams play with one thought, and that's "to win." The losing teams play with the thought "not to lose." The latter equates to fear and a lack of confidence, and these are a recipe for consistent failure.

Like many of you, I love the game of golf. I have a childhood friend who I play with sometimes. While our skill levels are near equal, I nearly always beat him. What happens is that as soon as he hits a really bad shot, he can't recover mentally. He allows this shot to have such a big impact on his game that the rest of the round of golf is a disaster for him. I, too, have a bad shot once in a while; we all do. The difference is that I don't let it interfere with my next shot. I know the bad shot will happen sometimes, which means it's actually a part of winning the game. As soon as my friend hits a bad shot, he is finished; then I win, game over.

I Love to Win, I Hate to Lose

After having so much success in a sport growing up, you feel like there is nothing in life you can't do. No matter what the task, not succeeding is never an option or thought. So you can imagine how shocked I was when I entered the trading world and was told that you have to be a good loser in order to win. Ha! I thought that had to be a joke -- there was no way I was going to lose because I hate losing; I hardly ever lose at anything because I try as hard as I can to work harder and smarter than my competition. It didn't take long to realize that this was 100% true; I had losses, and that didn't sit well with me. I tried to eliminate them, but as I did, I also eliminated the winning trades as well. This was not good; I hated losing. Slowly, I figured out the secret to trading from experience and from a friend of mine. It all depends on your definition of losing. In my early trading days, I had the wrong definition of the word "loss."

Perception Is Everything

Think about all the setbacks and losses you have had in other parts of your life, in terms of your financial experiences, relationships, job promotions, etc. Haven't they always made you stronger and led to something "better?" Losing is a very necessary part of winning, in my humble opinion. As our founder at Online Trading Academy, Eyal Shahar, says, "Life is all about perception." If I had a dollar for every time I have heard him say that, I wouldn't have to trade. He is right. The key is to categorize. If I perceive each trading loss as just a loss, it's not going to sit right with me; I can't stand losing! However, if I put each trading loss in its proper place, which is in the "winning" category, all of a sudden a trading loss is a must for success.

I was leading a session, and I pointed out some short-term income trading opportunities that I ended up taking in my account. I went over the factors that led me to this conclusion and everything seemed fine.



The trades were in the euro, the S&P (INDEXSP:.INX), and gold futures. As you can see in the chart above, two of the trades were losers and one was profitable. You can also see that the net result of all three trades was a profit of $2,652.50. Notice the losses are much smaller than the gain. The losses should be no big deal, and they should be small. They should represent a small percentage of your account. Your position size should be such that you are not risking more than what you determine to be a truly acceptable loss. You should make sure this number, which is really your ultimate risk, is a number you are very comfortable with. With the numbers above, I can be wrong and lose money on two out of every three trades for the rest of my life and still do very well.

If you are doing this right and following the rules, your batting average should be well north of 50% -- but the point is that it doesn't need to be. If your losses appear scary to you, one of the main reasons may be that you are simply taking on too much risk for your comfort level. If the loss itself makes you cringe with anger or fear, you also have the wrong perception of losing. You have "losing" in the wrong category. We should take losses and move on.

Like Las Vegas, I don't care at all that I was only one for three that day. I know that as long as I stick to my rules, I am running a strategy that is very profitable because the risk is low, the reward is high, and the odds are stacked in my favor. I know that I will only achieve profits if I accept losses from time to time. When you shift your attitude and understand this, the word "loss" all of a sudden means the same thing as the word "win." On this day, the first of the three trades were losers. If you go and beat yourself up over a loss or think you did something wrong and become paralyzed by fear and failure, you will stop executing your plan and never see the gains.

From my experience, the rules that truly stack the odds in your favor are not that difficult. The challenging part is helping people shift perception of loss to the win category. I meet people often who actually think that the other instructors and I never lose. They want to take our classes because they think they will learn to never lose and only have winning trades. We may have a high winning percentage, but we certainly have losses. None of us like to lose; I know this firsthand from competing in sports. Just like in sports, however, falling down in practice is a must if you are going to skate faster. Striking out from faster pitches is a must if you are going to make it to the big leagues. Swinging your driver harder and slicing the ball 100 times is a must if you are ever going to hit a 300-yard drive straight. Imagine what would happen to a casino if it tried to eliminate the losses. It would be out of business, and none of us would have a playground in the middle of the desert to enjoy. Losing in trading is great so long as it's proper losing. To become a professional winner, you have to first become a professional loser. This is a road block that many people never overcome, which is why many people fail at market speculating. It's the few market speculators with the proper perception who get paid from the losses of (and the transfer of accounts from) those with the wrong perception. If you want to change, change your perception of loss.

Editor's note: This story by Sam Seiden originally appeared on Online Trading Academy.

To read more from Online Trading Academy, see:

Elasticity

Wrapping Up Synthetics

More Than One Way to Skin a Cat
No positions in stocks mentioned.
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