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Trading Gains and Losses - Learn to love your (small) losses

Updated: Jul 20, 2023

28th January 2022

I've been doing a lot of mental work with Steven Goldstein (@Alphamind101) over the past year. He is a trading coach that helps traders to deal with the mental side of trading. He's not there to teach the mechanical side of trading. It is assumed that the traders who consult him already know how to trade and what their edge is. His job as a coach is to help traders deal with the mental aspects of trading. I've found his program to be very helpful, along with various books I have read about trading psychology and various trading podcasts I have listened to that also focus on the mental side of trading.

One of the things Steven is big on pushing is the theme of learning to love your losses.

I appreciate that might sound disingenuous. We want to make profits, not losses. And why would we want to "love our losses"? Isn't it all about profitable trading?

Trading Gains and Losses

The reality is that trading is a probability game. No trader gets all of his / her trades as winners. Most of the best traders in the world only win on about 50% of their trades, some even less than that. I did a deep dive analysis of my own trades of the past three months last weekend and calculated that my winning percentage over that period was 44%. So 56% of my trades were losers. Yet I made money over that period.

Risk-to-Reward Ratio

Risk to Reward Ratio

The reason is that the losses were all kept small, and the winners were proportionally bigger. So over the entire data set, the net result was positive. The risk-to-reward ratio was favourable.

What was also very evident when looking back was that where I had executed stop losses and kept my losses small, in almost all cases, I would have been far worse off had I not cut those losses quickly and just held on. (and boy, oh boy, would some of the losses have been large given what has happened in the market recently).

After doing that, the idea of "loving your losses" became even further entrenched in my psyche. I came away feeling proud of the fact that I had contained my losses to a small amount and that they had not been able to do any meaningful damage to my trading account or to my confidence. In fact, the string of small losses served to provide a confidence booster to me as I came away feeling that my defence is solid, and as long as I stick to that robust defence approach, then I will be able to keep edging forward with my capital growth.

Success in Trading

Success in Trading

If there is a secret sauce to success in trading, it is to keep your losses small. The winners will come, and they will take care of themselves when they come. But the real secret to success in this business is keeping your losses small and avoiding big drawdowns in your trading capital.

It's a grind. It can be frustrating. You need to fully accept that trading success is a game of inches, not yards. And part of that is accepting that small losses are part of the game of trading.

Every trade has 5 possible outcomes:

  1. Big win

  2. Small win

  3. Breakeven

  4. Small loss

  5. Big loss

If you eliminate (5) from your trading results, then you'll survive in this business and lay the groundwork for success.

Learn to love your (small) losses!!


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