Losses

Losses are fundamental to trading because first of all they cost you money, second they can be disheartening or make you angry and finally if you don’t deal with them well you won’t be able to trade anymore.

The most often heard advice is “cut your losses and let your profits run”.

So the major question must be – why don’t more people do this?

Part of the answer is, the advice doesn’t provide guidance around how to do it which is because everyone is different.

There is a great podcast episode which addresses some of how we feel about losing and being wrong, specifically in the field of betting.

It is from the Farnam Street blog and the episode is an interview with Annie Duke.

Another person who conveys a great understanding of the necessity of dealing with and impossibility of avoiding losses, is Ed Seykota.

His manner of dealing with losses can seem a bit facetious but after a while I realised this is probably more directed at the ridiculous attempts to avoid losses in the course of trading.

He has a somewhat famous song called the whipsaw song. The lyrics essentially discuss ‘the nature of the game’.

If you’re going to catch a trend, you’re going to have whipsaw losses. You might be able to reduce them or reduce the size of them but you’ll never be able to get rid of them.

Memorable phrases that have stayed with me include:

  • What do we do when we catch a trend? We ride that trend right to the end!
  • How do we know when our risk is right? We make a lot of money and we sleep at night.
  • What do we do when the price breaks through? Our stops are in so there’s nothing to do.

The last one in particular prompts me to ask another question that has caused me much pain – why do I not put stops in?

 

have more confidence that I would still find / uncover good opportunities.  trading setups.