Wins live in the land of loss

7058346583_61c381e636_bI’m sitting here at my desk looking out the window. On my desk is a (perfectly normal and fair) coin that I had been flipping a while. Question: can you tell me how many heads I flipped?

Now, think about that question a few moments. If you had to guess, what would you guess? Maybe I’ve been sitting here watching Netflix for a couple of hours flipping a coin. Maybe I flipped it while I was on the phone for just a few minutes. Maybe I just flipped it once or twice. You probably could figure out some reasonable estimate of how long a (mostly sane) person would sit flipping a coin, add into it an estimate of how many times you could flip each minute, and come up with some kind of answer. You can probably guess that there’s some practical upper limit to how many times I flipped it, and the probability distribution of how long I’ve been flipping probably has a lot of weight near the origin and not much out in the tail.  If this was an interview question for a consulting firm, you could come up with some answer.

Now, here’s another question: how sure are you of that answer? How confident can you be that you’re within 10% of the right number of coin flips? This is the question that really matters. Ok… hold on to that thought.

Let me give you one more piece of information. If I tell you I flipped 67 tails, does that change your answer to how many heads I flipped? It should–now you know if 5, or 65, or 65,000 is a better guess. How confident are you about your guess now?

Here’s the point of this post, and it’s not a math lesson: heads and tails go together. You can’t have one without the other. The same process that generates the tails generates the heads. You might even say that heads and tails “live together” or that “tails live in the land of heads”.

This is such a simple observation that many of my readers probably already clicked away, but I want you to think of this in two ways. First, this lesson generalizes to life. I think you can often tell how successful someone is by asking how many times they have failed. Most big, successful businesses (and individuals) have a string of dramatic failures behind them. In some sense, we learn from those failures and move forward.

But there’s another way to think about this–life and business are really about the odds. Chance and luck do play a part, but you have to put yourself in those situations where chance and luck can work in your favor. The more times you’re at bat, the better the chance you’re going to hear that crack and everyone can just stand and watch the ball sail over the fence. One of the most inspiring quotes I’ve ever heard–and maybe it’s as much for its gritty realism as anything else, comes from Mark Cuban: “it doesn’t matter how many times you fail.It doesn’t matter how many times you almost get it right. No one is going to know or care about your failures, and neither should you… All that matters in business is that you get it right once. Then everyone can tell you how lucky you are.

If you’re a trader, think about your losses in this context. How do you feel about those losses? Do you feel shame? Fear that your next trade might be a loser? Do you do things designed to minimize the size and chance of your losses? (Be aware that those two things work against each other–fearful traders often generate very small, but very certain losses. This is one way to die as a trader.) Or do you welcome your losing trades?

Do you know that all of your winning trades live in the land of loss? Do you realize, wholeheartedly, that your losses and wins are two sides of that same coin? Do you know your losses are essential to your success? The more winning traders you have in the course of your career, the more losing trades you will have–winning lives in the land of losing, just like the heads and tails on that coin I flipped.

When we understand this–and if we are sure that we are trading with an edge–then trading becomes easy. Fear of loss vanishes

To me, this is a simple, but profound truth. It also just happens that this simple thing is one of the keys of approaching trading with a professional mindset, and becoming fully comfortable with probability, risk, and the nature of a trading edge–all essential to your eventual success as a trader or investor.



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.

This Post Has 8 Comments

  1. Jim

    Yup, I was thinking about this just the other day.
    There really is only one thing about success in trading. business, and any other performance oriented profession. It is how well you can take losses and failures. Many people blow it all up in 1 loss, risking too much that they can’t stomach their foolishness and quit for the rest of their lives. Only those who stay in the game have any possibility of success. You’ve gotta know how much pain you can take yet be able to keep moving forward.It’s not about instant success, it’s resilience, patience, and courage.

  2. Stewart

    Trading became a lot easier for me once I started to think of the process as a series of coin tosses (weighted slightly in my favour). Success comes from being able to spot unfair/biased coins. It’s not about being able to tell whether any given coin toss will come up heads or tails 😉

    Thanks for your post. Please keep up posting your thoughts.

  3. Tien

    Thanks Adam, this is the best piece on behaving in probabilities I have come across. We all know the (empty) trading platitudes about having a probablistic mindset, that only the long run expectancy matters etc etc but how many of us can truly operate out of that mindset. I love the slight shift in perspective here, and yet it’s so simple too! I also read somewhere (Howard Marks?) that the future can only be a RANGE of possibilities. So when a trade is a winner, I know that in an alternate universe somewhere, there’s a reality in which that trade was a loser. And vice versa with losses. It just helps with managing expectations. Thanks again.

  4. Mark Bray

    I’ve been chewing on this over the five or six weeks since you wrote it, and I’ve concluded that it’s one of the most important posts I’ve read on your site.

    Excuse the goofy analogy, but to me, taking a trade feels kind of like sneaking into enemy territory and rescuing a hostage–until I’m safely back there’s danger everywhere. And of course sometimes the mission fails. Dealing with risk and loss have been by far the hardest things for me in my journey as a trader and at the same time they’ve been a really interesting exploration of who I am as a person.

    Through trading I’ve found I have trouble accepting that I’m wrong. And acting out that non-acceptance by simply refusing to get out of a losing trade (I’m going to wait the market out!) has resulted in some devastating losses, usually followed by an equally devastating market reversal starting from the moment I finally surrender and exit with that big loss. And of course when I analyze it all later with a clear head I clearly see that if I would have just gotten out with a small loss and gotten back in at the next buy signal x number of points lower/higher, I would have ended up with a sizable profit (more pain). Then the next time a similar setup occurs the horrible memory of the prior loss stops me from taking a trade that would have resulted in a nice profit (even more pain).

    So, this experience has made me realize that protecting my “emotional trading account” is every bit as important as (and key to) protecting my actual trading account. Undisciplined trading that results in occasional large losses creates this ugly emotional shadow, a residue of pain that affects my future trading decisions, which in turn affects my bottom line and my overall satisfaction with life. Taking a small loss is a little annoying, but it doesn’t trigger that nasty dumb behavior–>emotional scar–>more dumb behavior cycle.

    I found the only way I can exist in the “land of loss,” the only way I can even trade, is by making sure my decisions never trigger that explosion of bad feelings. The only way to do that is to be absolutely disciplined in my trade management. For some reason humans are built so that one bad experience can wipe out 10 good ones, so I have learned to just never relax my discipline. It’s not worth it. This approach feels so much better than looking at the trading app on my phone at all hours of the day and night hoping for that big reversal that’ll save my trade and my ego.

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