Managing your Fear of Loss

[dc]P[/dc]eople talk about “learning how to lose” and “losing gracefully”. Truth be told, that’s a concept I’ve always had trouble understanding. Though I know there is some wisdom in the idea of losing gracefully, I am a terrible loser. I hate to lose.

In fact, people who know me don’t usually enjoy playing board games with me, and my wife absolutely refuses—especially when it’s a game like Risk that involves world domination. Last time we played (many years ago), no one appreciated my tactic of beating a player into submission, making an alliance with my now-much-smaller former foe, conquering the world together, and then eating the smaller player for lunch. Lather. Rinse. Repeat. I tend to be a bit over-competitive.

But trading is different. In trading, I am a great loser, and, in fact, I have actively cultivated the skill of learning to lose. Early on, I struggled with the same emotions any new trader faces; when I put on a trade my palms would sweat, my heart would race, and I would find myself taking a bathroom break every five minutes. It soon became obvious that being emotional to that degree was overwhelming whatever rational analysis I was capable of making, and that I simply was not going to be successful until I learned to manage those emotions to some degree.

The breakthrough, for me, came when I understood something very important about risk and loss. (And this is important. It might even be the single most important thing I know about trading psychology.) There are risks in trading you should be concerned about, the risk of losing on your next trade is not one of them. In fact, that risk is not actually a risk at all!

Think about the things that probably should concern you as a trader: if you are trading too large (overleveraged), then you should be terrified. In fact, you should be so scared you can’t do anything else until you reduce your position size and are trading with an appropriate degree of risk. (Fear can be good.) Maybe you should be afraid about tail risk, or about the impact of some unforeseeable geopolitical risk. (I’d argue that those are risks that simply must be accepted as a cost of participation in financial markets.) Perhaps you should be concerned about breaking discipline and doing something dumb. You should definitely be concerned that maybe you’re trading without an edge and your approach doesn’t actually have the potential to pull profits out of the market, unless you have strong evidence to the contrary. In all of this, I’d argue that that last trade you just put on, whether it is in Apple, Facebook, the euro, gold, or the crush spread—whether that trade wins, looses, or breaks even is not something you should even be thinking about. In fact, the best mental state is simply to not care about the outcome of any one trade.

Why is this? Well, your trading results are the sum of your wins and losses, and you absolutely are going to have losses. Trying to avoid those losses is very dangerous; you must accept them and welcome them. The grocery store owner with a thriving business (i.e., his business is working—just like a trader with an edge) does not agonize over buying inventory, or that some percentage of his lettuce will spoil before it can be sold. This is simply a cost of doing business, and he could have no profits without lettuce to sell. As a trader, your losses are your cost of doing business and you cannot have profits without those losses. You must learn to think over the next 20 trades, not the next single trade. You must avoid attaching too much importance to any outcome.

When I realized this, trading changed for me. I knew it was different the day I put on a position, asked myself what I thought would happen, and found the answer “I really don’t care.” That’s the key: you have to be able to not care. (This does not mean you are irresponsible. You still must do the hard work of trading, be perfectly disciplined, and manage all of the other risks of trading. About those things, you must care deeply.) I think this is also something that goes beyond intellectual understanding. I can point you toward the realization. You can read the words I write here and understand them, but you have to accept the lesson into a deeper part of your self, and that takes some time. If you truly understand loss, you can accept that loss, make it a part of who you are, and use it for your success.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

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