If you aren't taking losses on a regular basis, then you aren't trying hard enough.
A very large percentage of the content on financial, social media is a celebration of great predictions and stock picks. Making fun of people that make bad calls is another very popular activity on sites like Twitter.
Focus on the Bad Calls and Mistakes
What you won't find on the internet is a discussion of taking losses and being wrong. This isn't surprising. It is human nature to focus on the positives and ignore the negatives, but if you want to be a really great trader, it is extremely important to focus on the bad calls and mistakes rather than ignore them.
Bad calls, lousy stock picks, poor timing, and various mistakes are just part of the trading process. They are inevitable, and if you try too hard to avoid them, then you likely aren't going to be making much money. As hockey great Wayne Gretzky once said, "You miss 100% of the shots you don't take.'
To use another sports analogy, batting average does not determine your level of success in trading. It is the size of your gains and losses. You can be right, just 10% and batting .100, but if your losses are small and your gains are big, you will still be very successful. It is better to hit for power than average.
Legendary market strategist Byron Wien once said: ''In our business, we're all wrong a lot. The problem is the penalty for being wrong and recognizing it early is very low. The penalty for being wrong and keeping blinders on is very high.'' In other words, striking out does carry a high cost because you have an unlimited number of 'at bats' as long as you have capital.
Warren Buffett has said: "You only have to do a very few things right in your life so long as you don't do too many things wrong" That doesn't mean Buffett avoids mistakes. He is very quick to admit his mistakes, and then he spends his time focusing on things that he has gotten right. Buffett has built his great wealth in just a dozen or so great stocks. He eliminated these mistakes early and did not let them detract from the power of compounding his good investments.
Cultivating a Mindset
Cultivating a mindset in which it is not just ok to take losses but to do so without suffering emotional trauma is what leads to great results. If you are willing to make a mistake and have implemented a plan to cut mistakes quickly, then there is good reason to keep on trying until you hit a home run. If you have confidence in your trading methodology you will eventually have a winner, but if you are afraid you might make a bad call, you will never try hard enough to find that winner.
While you always want to approach a trade with the best possible risk management, we can't let the potential for losses keep you on the sidelines. When you embrace losses and view them as a normal product of your trading, you will find that you will have better luck. If you are fearful of not being perfect, you are likely to forego the trades that carry high risk as well as high reward.
Jesse Livermore, who is regarded by many folks as one of the best traders ever, employed an approach he called "probing buys," which I use in my own trading. The idea is to take a position in a stock that looks interesting and then decide whether to pursue it more aggressively or not as conditions develop.
The key is to put some money on the line and not worry if it is a loser. If you wait for the perfect situation you might never even begin to trade some stocks. Making a probing buy changes the dynamic. It may still turn out to be a loser, but you will view the situation differently if you have a high expectation of being wrong.
If you don't have a regular diet of small losses, you are probably too conservative in your trading or not disciplined enough. It is easy to fall into the trap of holding on to a loser because you don't want to book the loss and admit it was a mistake. You have to be very disciplined and systematic in taking losses.
Quite often, taking a loss will be a mistake as well, but the important thing is to embrace losses as part of your trading routine and you will find that you have greater potential for big profits. As the old saying goes, "You can't win if you don't play."
