Taking a loss!

From Trader Daily:

The most common reason traders are reluctant to take a loss is their fear that once they do, the trade will rebound. Sound familiar? If this is how you think about taking losses, try to recognize that this kind of thinking might well prevent you from reaching your potential. It might even destroy your career. So stop trying to be right all the time - trading is a game of probabilities, which means winning and losing are necessary components. No one gives a bonus check to the trader who was 'right' the most over the course of the year. To coin a phrase, wrong happens. Great traders know how to implement damage control and are willing to take a loss. Are they scared and hesitant? Of course, but that doesn't prevent them from doing what they need to do to stay in the game. If George Washington hadn't decided to abort the Battle of Brooklyn and cede Manhattan to the British at the start of the Revolutionary War, for example, we'd all be eating 'crisps' and watching the 'telly' right now. He took a loss - but lived to fight on. That's what true champions must sometimes do. A client of mine - I'll call him Aaron - is a bond trader at a major bank. He was earning seven figures annually but envisioned taking his game to another level. During our first meeting, Aaron showed me his numbers, proudly pointing out that he was winning a healthy 81 percent of his trades. He rambled on, saying that his number was the highest in his group and telling me his managers had asked him to train other traders to be as 'consistent as I am.' I looked Aaron straight in the eye. 'Was your performance bonus based on your winning percentage?' I asked him. He paused. 'No,' he replied. 'Exactly my point,' I told him. Put simply, Aaron needed to stop obsessing about being right and start focusing on making money. Several follow-up meetings made it clear that he was taking his winners quickly and holding his losers way too long, even adding to them in some cases. I challenged him to think about what might be triggering this tendency. 'The trade can always come back,' he told me. 'Maybe I'm just not giving it enough time.' That's not an answer; it's a rationalization. 'Come on,' I told him. 'You're either a control freak or a perfectionist, but you always seem to have to be right. And this is limiting your ability to reach your potential.' Aaron, I was discovering, was afraid to admit when he was wrong. So I presented him with a simple formula to help him get out of his own way: H + W + P = E. Hoping + Wishing + Praying = Exit the trade now!


Doug Hirschhorn, a former Division I baseball player and commodities trader, has a Ph.D. in sport psychology. He is the coauthor of The Trading Athlete and has served as trading coach for Deutsche Bank, Schonfeld Securities and Balyasny Asset Management. He is currently a consultant for financial institutions, trading firms and hedge funds. E-mail him at headcoach@tradermonthly.com.

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