For traders one of the worst characteristics of social media, and the internet in general, is that they promote the perception that making losing trades is shameful and a sign of a poor trade. CNBC and Twitter are loaded with 'experts' that act like they never have a losing trade. These people want to sell themselves as experts and they think the best way to do that is to pretend that they are always correct. It is highly unrealistic but it does fool enough people to make it worthwhile for the charlatans.
The reality is that traders that focus too much on avoiding losing trades tend to produce poorer results. If you don't lose money you will never have big returns. The only way to produce exceptional returns is to take higher levels of risk, and when you take more risk the chances of a losing trade are greater.
The easiest way to avoid losing money is to focus on trading the most conservative and slowest moving stocks. It is like only betting on the heaviest favorite in a horse race. Your chances of being right and winning a small amount of money are high but the overall results aren't as likely to be as good as those that embrace more risk on a selective basis.
If you don't have a steady diet of losing trades you probably aren't trading at optimal levels. That may seem counter-intuitive because good traders should consistently find good trades but you have to recognize that the market will always have an element of luck and uncertainty. If you only take those trades that are a 'sure thing', most of those trades will produce minimal returns since there is no risk and you will often find out that there really is no sure thing.
When you enter a trade you have to embrace the likelihood that you will be wrong and will lose money. Once you understand your fallibility it becomes part of the process and allows you to be more aggressive in pursing the best trades. When you see big potential but forego it because there is some risk of loss then you are sure to have mediocre returns.
Rather than say to yourself, "I'm not going to take that trade because it is too risky and I might be wrong," the better approach is to think, "This is a high risk trade and I might be wrong but I can manage a loss and the odds of a positive outcome are good." When you avoid a trade simply because you hate to have a loss you will also forego the trades with the best potential.
This past week Tilray (TLRY) provided a very good example of this conundrum. Many traders avoided TLRY because they viewed it as too risky and too uncertain. Those that did take a trade, long or short, did so because they felt that even if they are wrong they can take a loss without suffering too much damage. They knew they had a high risk of being wrong but what was important was the ability to control the loss if they were wrong. It might seem crazy to buy a stock that has questionable fundamental value but is going parabolic, but if you willing to risk being wrong the potential gain was dramatic.
The key to trading like this is the suppression of ego. If you don't see a loss as a shameful event that could never be admitted to publicly then you look at trades in a different way. A loss is just part of the process and when you stop trying so hard to avoid them you can enter more trades with more upside potential.
If you aren't experiencing losses on a regularly basis you probably aren't being aggressive enough. Losses are a necessary cost of business and if you have to allocate a certain amount of money toward them in order to grow and prosper.
When losing trades are just part of your regular routine you will be a better trader.
