The Right Approach to Losses First of all, understand that losses are a necessary part of any risk taking activity. The goal should always be to blunt the impact of losses as opposed to eliminating the losses altogether. There is a distinct difference between minimizing the impact of losses versus minimizing the number of losses. If the money you are risking stands between you and hunger, think twice before placing it on the line. Risk capital must be true risk capital. Second, losses are better teachers than wins. As noted above, wins often lead to complacency. Losses usually compel you to figure out “why.” If small and incidental to your overall strategy, they confirm that your plan is working. If relatively outsized and/or unexpected, losses make you examine the precedent trades and determine if your strategy should be adjusted. This is how advancement happens. Thomas Edison needed nearly 10,000 tries to find filament for an incandescent bulb that would last for more than a few hours. Of the thousands of attempts that did not produce the bulb, Edison did not see them as failures, but rather as things that didn’t work which was useful knowledge in and of itself. By knowing what didn’t work, Edison was able to find his way to what did. Containing and then examining your losses will help you do the same with your trading strategy.
Posted on: Sun, 23 Jun 2013 18:06:25 +0000
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