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It is an extremely important discipline – that of happily accepting losses. To many new (and some not so new) traders, the thought of a losing trade is simply not acceptable.
The reality of trading is of course a mixture of both wins and losses with success being dictated by the ratio of those wins and losses, and it is a complicated ratio.
I often see it defined as “you must aim for a win to loss ratio of at least 2:1”. Well that’s nice work if you can get it. The markets rarely allow us the luxury of employing anything as straight forward as that.
The real ratio in most cases is to be able – in general – to make more wins than losses and for those wins to be greater in value then the losses.
Yes it would be nice to only enter those trades that will definitely give us at least a 2:1 winning ratio but I have yet to hear of any trader that can consistently do this. The market just does not operate in that certain way.
Because of this, a vital part of any trading method must include money management. By employing a well developed strategy of money management, it helps to even out the wins and losses thereby allowing you to easily accept the losses that will most certainly be coming your way.
If each time that you trade, your very survival depends upon a win, then you will not like the prospect of a losing trade, but rest assured that sooner or later – and likely sooner - you will get one whether you like it or not.
Many new traders look for, or try to develop, strategies that rarely if ever lose. This is a fruitless exercise.
One of the things that has to be accepted by traders is that no matter how successful the method that you follow, there will still be losing trades.
Imagine, just for the purpose of illustration, that you have a method that wins 80% of the time (I am not claiming that an 80% success rate is normal, because it isn’t, this is just for example).
This means that you will lose 20% of the time, or in other words, of the next 100 trades that you make, 20 will lose and 80 will win.
The trouble is that you do not know in what order the wins and losses will occur.
If you were unfortunate, you could find that the next 20 trades that you execute all lose. If you elect to trade a high percentage of your trading account, you could be wiped out before a winning streak begins, and this would be a shame because theoretically, the next 80 trades would all have been wins.
Of course, 20 straight losses are very unlikely, as are 80 straight wins - but it could happen.
If you learn to employ a strict system of money management, together with a trading method that in general gives you more wins than losses and bigger profits than losses on those wins then you will be able to smile at your losses, because you will know that over time, you will still be profitable.
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