Losses – The Cost Of Doing Business

By | May 11, 2016

Losses – The Cost Of Doing Business

How one approaches trading will ultimately determine if he’s going to be successful at it or not. Some people think trading is a sort of salaried position – they run back-tests or use performance simulation calculators, torturing the data until they get the monthly/yearly figures desired. So they ‘sign the contract’ and start trading, full of confidence. But reality soon catches up with them and exposes the rosy calculations and projections as the worthless numbers games they always were.

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages – Jesse Livermore, Reminiscences of a Stock Operator

Others begin trading with the correct mindset – viewing it as the business it actually is. While they get some things right (for instance the irregularity of income) many still fall prey to a big mistake, namely their approach to losses.

Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong, not taking the loss, that is what does the damage to the pocketbook and to the soul. – Jesse Livermore, Reminiscences of a Stock Operator

To put it very simply, the principal goal of a businessman is to obtain profit. He can do so by adjusting the two sides of the ledger – revenues and costs – normally trying to maximize the first and minimize the second. The trading equivalent of revenues are winning trades and the equivalent of costs are the losing trades.

I want you now to think of how a business owner treats the business expenses, such as advertising, hardware acquisition, employee wages, and so on. Does he feel anger, being stupid, shame or other negative emotions ? Of course not. He views them as just the planned, recurring cost of doing business. If he would try to cut all or most of these expenses, his company would just cease to exist.

This is the point where many traders make the mistake of emotionally attaching themselves to losses. Thus, they don’t see them as a normal part of running a business and therefore they try either to virtually eliminate them by searching for ‘90% win rate wonder systems’ or to ignore them by not using stop losses.

It’s impossible to trade without losing (as a matter of fact, many successful traders win on less than 50% of trades) just as it’s impossible to run a business without incurring costs. Keeping this simple fact of life in mind will most probably make you if not a better trader, certainly a less stressed one.