Why Losses Are Part of the Journey – Normalizing setbacks in trading.

Why Losses Are Part of the Journey – Normalizing setbacks in trading.

• The reality of losses in trading
• The nature of trading: Recognizing that losses are inevitable is the path to success!
• Understanding losses in the context of trading
• Losses are a valuable lesson!
• Treat trading as a long-term game: Look at losses in How do I deal with losses?

The reality of losses in trading

The world of trading, whether in stocks, commodities or Forex, is often portrayed as a fertile field for achieving huge profits if the appropriate strategies are followed and advanced analyses are conducted. Although this perception is presented alongside an emphasis on how dangerous this world is, many traders, especially beginners, always see losses as an unacceptable part of trading. In fact, if they are exposed to such losses, a significant portion abandons trading.

According to research conducted by Bloomberg, more than 80% of daily traders stop trading within the first two years, due to the lack of clear strategies and a precise understanding of both traditional and modern trading mechanisms, which prompts these traders to make emotional decisions that lead them towards accumulated losses.

Therefore, the trader’s denial of the concept of losses and his refusal to be exposed to them is one of the misconceptions among traders in general; Rather, perceiving trading losses as a financial setback, and even as part of the trading journey, can increase a trader’s experience, push him to seize future opportunities, avoid emotional or impulsive decisions, and preserve capital and achieve profits even during difficult periods and circumstances, whether those surrounding the markets or the trader himself, so that losses become a tool that enables the trader to achieve victory. 

In this article, we will explore the reality of trading losses, why they are a natural and inevitable aspect of the process, and how traders can develop a mindset that accepts risks and views losses as opportunities for growth rather than defeat.

First. The nature of trading: Recognizing that losses are inevitable is the path to success!

Trading, whether in stocks, forex, commodities or other financial markets, is an activity surrounded by an environment of uncertainty, meaning that despite following the best strategies, research and analysis, losses are an inevitable part of trading.

Part of the trading journey is related to the fact that even the most experienced and skilled traders go through periods of declines and losses because the world of money is surrounded by many variables, many of which are beyond the control of any individual trader, such as sudden geopolitical events that change clear market trends.

Understanding, believing in and acknowledging this part does not reflect a sign of weakness, but rather is an essential part of developing the mindset of the trader, making him more flexible and adaptable to the markets, and even to the noise surrounding the world of money (such as that raised by fake experts, or misleading advertisements when they promise permanent profits).

Making profits in the world of trading as a primary goal must include the fact that long-term success is not only about avoiding losses completely, but also about managing them, so understanding exposure to losses during trading is a tool for risk management in its general sense.

Second. Understanding losses in the context of trading

The term "losses" in the world of trading is a broad concept, and carries many connotations, which if the trader understands them in general, will help him improve his strategy, or push him to change it and follow or create a new strategy that is consistent with his goals, or his personality and general behavior.

Therefore, losses may relate to matters beyond financial losses, to include what is involved in missed opportunities and making bad decisions, which can be explained as follows:

1. Financial losses:

This is the most common and immediate form of losses during trading, which occurs when the market moves against the trader's expectations and analyses, leading the trader to deplete his capital, for example: the trader buys a stock at $10, expecting it to grow due to news or analyses indicating the success of the company to which this stock belongs, but for a geopolitical reason or an emergency related to the company or market conditions, the stock drops to $8, causing the trader to lose $2.

From the previous example, it is clear that financial losses are a part that is easy to calculate, the reason is clear and can be avoided through many tools that will be mentioned later.

2. Missed opportunities:

This type of loss is less obvious, but very important, and occurs when the trader either fails to miss the opportunity to buy an asset whose price is rising for one reason or another, or when the trader fails to act on a potentially profitable deal, either due to hesitation or fear, such as the trader missing a strong buy signal due to his hesitation or fear, and just watching that deal pass before his eyes without seizing it.

Here, missed opportunities can be as painful as financial losses, because they reflect the potential profit that was not achieved, which often leads to frustration and guesswork.

3. Wrong decisions:

This type of loss that the trader is exposed to can be one of the most forms that push the trader to make bad decisions, either based on incorrect analysis, or being influenced by opinions, or based on emotional and impulsive decisions, for example, the trader sells a position early, believing either that the price has had enough of rising, or because he has heard a rumor, or is influenced by an expert’s analysis without checking his identity.

A wrong decision can also occur, driven by fear or greed, which leads the trader to act impulsively, leading him towards real and even accumulated losses, such as holding a losing position for a long time in the hope of a market reversal.

Third. Losses are a valuable lesson!

Some people portray trading in the world of financial markets as if it is always sailing in turbulent waters, which makes trading itself difficult for the daily trader who dreams of achieving quick wealth and buying expensive things with just the push of a button! Without accepting any scratch on their boats.

In addition to the study conducted by Bloomberg, there is a study conducted by the US Securities and Exchange Commission on Forex traders, indicating that 70% of traders lose money every quarter, while traders usually lose 100% of their money within 12 months.

One of those stories goes back to Matthew Schneider, a former stock market trader and CEO of e-States, who talked about his repeated losses, when he indicated that he lost his savings five times in daily trading, but he confirms that these losses did not mean the end of the world to him, despite their pain, but they were golden opportunities to learn, recover and turn huge losses into valuable lessons.

Fourth. Treat trading as a long-term game: Look at losses in a broader range of your goals

Experienced traders emphasize that achieving success in the world of trading must be part of a long-term plan, and not associated with temporary success, or frustration from the first experiences, which turns losses into part of the journey, and not the decisive step to end the journey at any stage of its stages.

Realizing this fact frees the trader from excessive focus on short-term performance, limited results, and even frees him from mixed feelings between doubt in self-performance or the market itself, in a way that increases awareness and avoids rash decisions, and refines the personality of a trader different from others, in a way that leads to the professionalism that many seek.

In fact, this fact has a great benefit, specifically in realizing and understanding that the most professional and experienced traders do not win all the time, and that everyone is exposed to loss.

Fifth. How do I deal with losses?

Based on what was previously mentioned about the distinction between losses, and the necessity of accepting those losses as part of the journey, it can be reached a realistic conclusion that indicates that the trader should ask about how to deal with losses, not how to avoid losses permanently.

Here are some practical tips that help the trader reach the answer to this magical and necessary question while trading, or while making the decision to start trading.

1. Accept losses and control your feelings:

Accepting losses is part of the trading game as previously explained, as there is no trader who has not suffered losses, no matter how accurate his experience, understanding and analyses are, and this acceptance must include avoiding exaggerated emotional reactions such as anger, frustration or fear, and the best advice for accepting losses is to be calm and avoid making decisions while angry.

2. Monitor long-term goals:

The trader setting his goals clearly, specifically long-term ones, enables him to consider losses as an integral part of the steps to reach those goals, in a way that increases his ability to accept them, deal with them and benefit from them with great wisdom, and the certainty that trading is about wisdom and not perfection.

3. Reviewing and analyzing losses:

Accepting losses is not the final step, but rather understanding these losses (whether financial, alternative opportunity, or wrong decision), then reviewing the circumstances surrounding those losses and analyzing them, is a great step for the trader to learn to avoid them later or mitigate their impact if they recur.

4. Learning risk management:

This advice involves three steps, the first is learning risk management literature from trusted sources (specifically professional experts: see an article entitled The Real Expert and the Fake Expert), while the second step is related to learning from previous losses or the losses of others to determine the appropriate strategy for you towards either determining stop-loss points or determining the appropriate position for you, while the third step is related to adhering to the rules of risk management and applying them in a practical manner.

5. Set realistic goals:

Setting realistic goals is related to the trader himself, whether by understanding his personality and psychological tolerance, or in terms of realizing his financial size, determining the money available for trading, and other matters related to the trader's social and professional surroundings, etc.

6. Take breaks when needed

There is no problem in making the decision to stay away from the market in case of tension or excitement after losses, in o

rder to avoid making wrong emotional decisions, as continuing to trade under negative emotionally charged conditions always leads to accumulated losses.

In fact, the trader's involvement in activities that restore balance, such as exercising or meditation, is essential, to charge the soul with positive energy and return to trading with a good mentality.

7. Keep trading notes:

The most skilled traders often have notes about their trades and experiences, whether winning or losing, which increases the chances of learning and acquiring new trading habits.

Conclusion:

A trader who wants to achieve success in any trade must understand losses, accept them, and learn from them through the previously mentioned advice, and even add to himself advice that may arise during his long journey of trading.

A successful trader must also surround himself with a wealth of knowledge, whether traditional scientific, or instant knowledge about the market he wants to start trading in, in addition to being familiar with the conditions that can affect the markets as much as possible.

In fact, there are some expert traders who refer to a golden rule that indicates that "a little adds a lot", which means being satisfied with specific profits in deals, and not being carried away by greed in a way that leads to unexpected losses.