Trading Not to Lose

Trading not to lose is an issue almost every trader will face at some point in their trading career. Ultimately, great traders, athletes, pokertrading not to lose players, or anyone at the top of their field, share one similar trait: they aren’t afraid to lose. They go after it, have a killer instinct, and want to take every opportunity they can to implement what they have practiced and studied.

Trading Not to Lose is Fear-Based Trading

As traders, we want to respect the market, but not fear it. It’s neither our ally nor our enemy; it’s a neutral sea of both potential and risk. Trading out of fear means we are too focused on the risk, and are unlikely to capitalize fully on the potential.

Losses aren’t taken when the stop loss level is reached. The loss is allowed to run, resulting in bigger losses than planned. Fear is a tricky thing in that it can cause us to get more of the very thing we are trying to avoid. When we are afraid to take a loss–because we haven’t fully accepted that losses are a natural and regular occurrence in trading–we may actually try to avoid taking losses and thus run our accounts into the ground. This is an element of “loss aversion.” It’s important to understand, on a belief level, that losses are part of trading. They can’t be avoided, and trying to avoid them may actually cause more damage.

These are symptoms of trading not lose. Trading not to lose is a product of focusing on whether we win or whether we lose. But winning or losing actually shouldn’t be our focus.

As traders, it’s our job to come up with (or learn) strategies, develop a trading plan, and then rigorously test that plan for profitability and our ability to personally implement the plan.

Once we have a plan, our goal is to trade according to that proven plan. The plan is researched, backtested and/or traded in a demo account, and then traded live with small amounts of capital until the plan is proven successful. Wins and losses take care of themselves. While we are trading we can’t care about wins and losses…we only care about following our plan and trading every valid opportunity our trading plan gives us.

When we aren’t trading that is when we can look at our wins, losses, profitability, and trading stats to possibly make adjustments if needed to the plan. But this doesn’t occur during trading; while trading and holding positions our focus is only implementing our plan.

This is easier said than done

While winning is the ambition of traders, “not losing” actually ends up being the dominant factor that affects trader’s decisions. This is because it is very easy to have knowledge of risk, but it is something entirely different to believe you can overcome it. This requires an internal “belief” change, not just knowing that a change is required

If you never trade through a losing streak, and instead change methods or make adjustments as soon as you have a few losses, it’s likely you’ll never attain any consistent success. Consistent success comes from relentlessly executing the advantageous probability of your strategy. No matter how that edge occurs, a strategy has an edge or it doesn’t. If it has one, you have to keep trading it.

Consider the following monthly returns for a swing trading system. Each month has multiple trades in it, so losing months typically mean there was a stretch of losing trades.

If you believe your strategy has a 60% win ratio, think about all the different ways that could be distributed over 100 trades. Theoretically, you could lose your first 40 trades in a row and then win the next 60. Likely the results will be more randomized than that, but when you place tens of thousands of trades over a trading career you’re likely to see statistics play out in seemingly bizarre ways. If you fall into the trap of thinking you need to change your strategy every time you hit a trading losing streak, you’ll never succeed long-term.