How many people do you think would attend a trading seminar that advertised teaching to lose small? Or, how popular would a workshop be that was dedicated to extolling the virtues of preventing big losses in the financial markets? My guess is that unless there were a lot of incentives (perhaps a free trip to Las Vegas or a flat screen TV), not many people would show up for these events. The reason – no one likes to hear about losing. Losing conjures up feelings of failure and pain. Since most human beings would rather avoid those two experiences, it is no surprise that anything dealing with these emotions has very little appeal to the masses.

Now, on the other hand, if there were a promotion on how to trade with no risk, great profit potential and hardly any work, it would be difficult to find a venue large enough to hold all the attendees. In reality, most of us know that no such thing exists (as much as we wish it did). This brings us to the reality of trading.

In class, I like to draw upon analogies – one of my favorites when discussing the psychology of trading is to liken a trader to a boxer. A trader who hates, or fears, losing is akin to a boxer who does fears taking punches. This, let’s refer to him as a timid boxer, is the pugilist who always has his elbows close to his body and his hands covering his face. Always on the defensive, this fellow rarely throws a jab as he is always on his heels. He is the one who is always clinching, hoping to stem the onslaught of punches being hurled at him. There is a commonly used quote in boxing – the clinch can keep you from losing, but it can’t make you a winner.

The parallels in these two areas of endeavor are striking. For example, a trader must accept small losses, just as a boxer must know how to take a punch. However, neither one must let their guard down because just one blow to the chin (one big loss) could be “game over.” Likewise, the skilled boxer dodges and weaves, taking a few innocuous punches, until he sees an opening to strike his opponent where the most damage can be inflicted. In the same fashion, a trader incurs modest losses until he nails the trade that reaches his target.

The victor in a boxing match, or in any competition for that matter, is usually the one who can sense their opponent’s weakness and exploit it. In boxing, this is referred to as the “killer instinct” or “going for the jugular.” This occurs when you see a boxer backed into a corner and the aggressor does not let up on his assault, until the referee stops the fight with a technical knockout, or the timid boxer ends up supine on the canvas. This can also be seen in other professional sports like football where one team has a fourth-and–goal, the winning team usually goes for the touchdown in that scenario. Meanwhile, the team playing “conservatively” settles for a field goal. I find that aggravating to see.

In the day trading arena, this goes on every day – the difference is that in trading, most of the beatings are self-imposed.

Put another way – winners play to “win,” as opposed to playing “not to lose.” When a trader begins to love to take small losses, then, and only then, can he/she begin to play to win. Those of you that have been reading “Lessons from the Pros” have read comparable themes from me or other writers at Online Trading Academy. Nonetheless, some lessons bear repeating, and this is one of them.

I believe the only way to begin embracing the losing aspect of trading is to gain the skill that will enable you to compete. I always tell my students, “The successful traders that I am acquainted with are some of the smartest people I know and that is who you will be competing with.” I also tell them that in my many years of trading I have only known two types of traders – traders that have lost money, and traders that are going to lose money. The difference between the survivors and the ones that have gone by the wayside is in how they have reacted to their losses and the size of those losses.

This is an excerpt from October 2009 issue of Trader's Journal.