Updated from its original posting on 2013-01-04
Losses are inevitable. It’s as real a fact as the sun rising in the east and setting in the west. Sooner or later, everyone is going to get a bitter taste of defeat. But you don’t have to worry. Even the best fall down sometimes.
Take for example the world famous investor Warren Buffet. In an interview, he once talked about how buying Berkshire Hathaway was his worst trade. He recalls of letting his emotions get the best of him when he got ripped off that he ended up putting out money on a terrible business.
George Soros, another successful investor and renowned business magnate, has also had his fair share of losses. Back in 1987, his fund ended up sustaining a 300 million USD-loss and endured low returns for the rest of the year when the U.S. housing market crashed.
The Russian debt crisis also cost him 2 billion USD in 1998. The year after, he sustained another 700 million USD loss in the tech bubble when he bet on a decline. He wanted to redeem himself then and anticipated a rise but it cost him almost 3 billion USD when the market finally tanked.
The worst possible way a trader can respond to losses is to be indifferent about it. While not getting too high nor too low following a loss is key in keeping emotional stability, the lack of any feeling whatsoever may lead to indifference, which could prevent the trader from learning from the experience.
In fact, I met this trader long time ago who absolutely loved to test out all sorts of trading systems. He would backtest and forward test dozens of trading systems, trying to see which one was best for him. At the end of his search, I asked him if he was able to pick a system that he liked.
He said that he didn’t choose one. When I asked him why, he said, “Well, whenever I picked one, it would work for awhile, then it would start incurring losses.”
I asked him what he did next and he simply responded, “Well, once it stopped working, I would just junk the system and move on to the next one!”
Taking this kind of approach will not help you develop as a trader because it lacks introspection. Moreover, it’s downright wasteful. Rather than taking the opportunity to learn from it, shrugging off a loss means missing a great opportunity to grow as a trader.
Imagine if the Wright brothers had simply given up after failing to get off the ground with their first flying machine. It would have probably taken much longer for mankind to take flight. Likewise, Thomas Edison is said to have botched 10,000 prototypes before he finally came up with a working light bulb.
What these guys had in common is that they embraced past failures and used them to ultimately achieve their goals.
When it comes to forex trading, we must adopt a similar attitude. It’s not enough to simply say, “It didn’t work.” You shouldn’t kill off potential growth with indifference. Instead, you should examine your losses carefully and determine what you did wrong. Ask yourself what you could have done better and use that information to learn and improve.