Featured Article

The Perception of Loss

Sam Seiden
Online Trading Academy, Chief Education, Products, and Services Officer

I am a winner

My whole life, I have been very involved in sports. Ice hockey, soccer, golf and tennis are the sports I love to compete in. Playing hockey at such a high level, I learned how to win consistently. There were always teams in the league that would win consistently and others that would lose. When we would play a team that had a bad record, sometimes they would be leading the game for a while, but I never worried. It was almost like we could be down by a few goals and we knew we were going to win. This is because of our positive attitude. Sure enough, most of the time no matter what the score was during much of the game, we would come back and win. The winning attitude almost always beat the losing attitude and always will. The winning teams play with one thought, that’s “to win.” The losing teams also play with one thought, “not to lose.” The latter equates to a lack of confidence and fear and that is a recipe for consistent failure, losing. Like many of you, I love the game of golf. I have a childhood friend I play with sometimes. While our skill levels are nearly equal, I almost always beat him. What happens is that as soon as he hits a bad shot, and I mean really a bad shot, he can’t recover mentally. He allows this shot to have such a big impact on his game that the rest of the round of golf is a disaster for him. I too have a bad shot once in a while; we all do. The difference is that I don’t let it have anything to do with my next shot. I know the bad shot will happen sometimes which means it’s actually a part of winning the game. As soon as my friend hits a bad shot, he is finished; I win, game over.

I love to win, I hate to lose

Having so much success in a sport growing up, you feel like there is nothing in life you can’t do. No matter what the task, not succeeding is never an option or thought. So, you can imagine how shocked I was when I entered the trading world and was told that you have to be a good loser in order to win. HA!! That had to be a joke I thought… There is no way I am going to lose because I hate losing, I hardly ever lose at anything. It didn’t take long to realize that this was 100% true; I had losses and that didn’t sit well with me. I tried to eliminate them but as I did, I also eliminated the winning trades as well. This was not good; I hated losing. Slowly though, I figured out the secret to trading from experience and a friend of mine. It all depends on your definition of losing. In my early trading days, I had the wrong definition of the word “loss.”

Perception is everything

Think about all the setbacks and losses you have had in other parts of your life – financial, relationships, job promotions and more. Haven’t they always made you stronger and led to something “better?” Losing is a very necessary part of winning, in my humble opinion. As our founder at Online Trading Academy, Eyal Shahar says, “Life is all about perception.” If I had a dollar for every time I have heard him say that, I wouldn’t have to trade. He is so right… The key is to categorize. If I perceive each trading loss as a loss or losing, it’s not going to sit right with me; I can’t stand losing! However, if I put each trading loss in its proper place which is in the “winning” category, all of a sudden a trading loss is a must for winning.

Apple Inc. (AAPL)

I was in the Extended Learning Track (XLT) class one time, leading a session and I pointed out a trading opportunity in a popular stock, Apple. I went over the factors that led me to this conclusion and everything seemed fine.

Figure 1

I pointed out that area “A” on the chart appeared to be a resistance (supply) level where we may have some sellers. As price rallied back up to that level at “B,” I was an interested seller. Some of the 300 or so people in the XLT asked about area “C.” I said that was also a supply level and could be a good one, but price was going to hit area “A” first. At “B,” price touched the level and actually fell for a bit; the trade was profitable. A couple of days later, the unthinkable happened; AAPL rallied through the level and stopped out for a loss. How could I have been wrong? How do I deal with this loss? What is wrong with my trading plan? I better email an Online Trading Academy instructor and figure out my mistake.

Well, if you’re thinking along the lines of the last four or five sentences, you are on the wrong mental path. That loss should be NO big deal and small. It should represent a tiny percentage of your account. Your position size should be such that you are not risking more than what you determine to be a truly acceptable loss. You should make sure this number, which is really your ultimate risk, is a number you are very comfortable with. In one of my lower risk accounts, I keep the losses to $1000 or less. Let’s take a look.

Figure 2

Here is a picture of the AAPL profit and loss window just as the loss was taken. If that $960 dollar loss appears scary to you, then that is simply too much risk for your comfort level. If the loss itself makes you cringe with anger or fear, you simply have the wrong perception of losing. You have “losing” in the wrong category. The loss is taken and we move on. While Area “A” represents the picture of a supply and demand imbalance that typically causes price to turn, this one didn’t have as much supply as I thought. As price went past supply area “A,” it quickly zoomed up to supply area “C.” Applying the very rule-based strategy that I employ, it was time to short again.

Figure 3

As price reached that level, there were plenty of willing sellers; supply exceeded demand. Price quickly turned and reached a 3:1 reward/risk profit threshold. Based on rules, the protective buy stop was moved to breakeven which meant this was a free trade, the risk was minimized to no loss. Taking another “bite at the apple” was profitable. Had I focused on the first loss being a losing activity and felt bad about it, the gain on the second trade never would have happened because of a fear of being wrong. Taking a small loss in trading is not wrong at all, it’s the right thing to do and a MUST if you are ever to enjoy gains.

Like Las Vegas, I don’t care at all that I was only 50% accurate that day. I know that as long as I stick to my rules, I am running a strategy that is very profitable because the risk is low, the reward is high and the odds are stacked in my favor. I know that I will only achieve profits if I include and accept losses. When you shift your attitude and understand this, the word “loss” all of a sudden means the same thing as the word “win.” On this day, the first of the two trades was the loser. Just like AAPL, if you go and beat yourself up over a loss or think you did something wrong and become paralyzed by fear and failure, you will stop executing your plan and never see the gains.

From my experience, the rules that truly stack the odds in your favor are not that difficult. I go over these rules each week in the Extended Learning Track (XLT) program. This is the easy part of my job in the program. The hard part is helping people shift perception of loss to the win category. I meet people often that actually think I and other instructors hardly ever lose. They want to take our classes because they think they will learn to never lose and only have winning trades all the time. We have a high winning percentage but we certainly have losses. None of us like to lose; I know this firsthand from competing in sports. Just like in sports, however, falling down in practice is a must if you are going to skate faster. Striking out from faster pitches is a must if you are going to make it to the big leagues; swinging your driver harder and slicing the ball 100 times is a must if you are ever going to hit a 300 yard drive straight. Losing in trading is great so long as it’s proper losing. To become a professional winner, you have to first become a professional loser. This is a road block that many people never overcome which is why many people fail at market speculating. It’s the few market speculators with the proper perception that get paid from those with the wrong perception, the transfer of accounts. If you want to change, change your perception of loss.

Hope this was helpful, have a great day.

– Sam Seiden sseiden@tradingacademy.com

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.