If You Aren’t a Loser, You Will Never Be a Big Winner

On the road to success, one of the biggest hurdles for most traders is gaining the ability to recognize that losses are not a big deal. They are just a normal part of trading and don’t reflect on your ability or skill. There is no shame in taking a loss, and if you try too hard to avoid losses, you are likely to have poor results.

Compare trading to professional poker. Professional poker players fold a substantial number of their hands. They determine that they hold poor cards, so they quickly take their loss and wait for the next opportunity. Waiting for a better hand is just part of the strategy, and if they keep those losses small, they can afford to wait for the right circumstances and then go for the big win.

Poker players constantly study what happens with each hand and learn something new every time. There is no shame or embarrassment when they fold and take a loss.

It is an essential part of poker strategy, and it doesn’t negatively reflect on their abilities or skills. In the stock market, there is a different dynamic. Many investors cringe at the idea of admitting that a large percentage of their trades don’t work out. They want to pretend that their decision-making ability is nearly perfect.

One of the biggest drawbacks of stock market punditry and social media is that few investors talk about their struggles. It is the nature of the trading business that you will have a substantial number of losses, and some of them will be sizable. Instead of treating it as a routine part of trading, however, many pundits try to cultivate this air of perfection.

Part of this is because it hurts our self-esteem to talk about how many bad trades we may have when the reality is that they are a great learning tool. Since no one else dwells on their losses, we must be real losers if people really knew how many bad trades we have.

If you tallied up all the great trades you read about on X, then there must be hundreds of unknown billionaires out there. We may not be as good as those folks, but at least we can pretend that we are when we have a trade that works. Another reason we hear so little about losing trades is that many people have something to sell. Maybe they just want attention or followers, but if you want special attention, then you better have some special skills, such as never having a bad trade.

The truth is that to produce big, impressive gains, you must suffer many losses. The key is to keep them small. A trader doesn’t need to be right most of the time to make money. She can be wrong 90% of the time if the 10% of the trades that work are big winners. One Nvidia NVDA offsets hundreds of losses.

One common problem for newer traders is "analysis paralysis." Rather than putting money on the line and seeing if a trade works, they keep looking for an edge that will assure them that they can’t lose. They want the perfect setup, but by the time it becomes clear they are right, the big move has already occurred.

Jesse Livermore, who is considered by many to be one of the greatest traders of all time, would use probing trades to determine if he was on the right track. He would put some money on the line at an early stage before he was fully confident and then watch the trade as it develops. If he felt good about it, he would leverage up his investment. If he didn’t like the way it was acting, he would take his loss and move on. There was no shame in being wrong. Not only does this fear of being wrong cause you to avoid taking trades that may turn out well, but it can also keep you in a trade that isn’t working.

The longer we hold a stock, the more likely it is that we become invested in it emotionally and financially. It becomes increasingly difficult to cut a laggard when we have watched it in our portfolio for months or years. We are prone to what is known in behavior economics as "confirmation bias," which means we only look for evidence that confirms our positive viewpoint.

Many of my best trading results come from trades that look poor at first, but if it was overly precise with my entry points, I would never even be in the stock. I may take multiple losses before a trade eventually works, but sometimes you just have to put your money on the line and see what happens.

The stock market isn’t like baseball. You don’t need to have a high batting average to produce huge returns, and you have an unlimited number of swings if you keep your losses small. If you aren’t producing a steady number of losing trades, then you aren’t trying very hard. As hockey all-star Wayne Gretzky once said, “You miss 100% of the shots you don’t take.”

The perfect trading and investment approach is one that embraces a high number of losses.

At the time of publication, DePorre had no position in any security mentioned.