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Published On: Thu, Jan 12th, 2017

Why Success in the Stock Market Depends on Losses

If you’ve ever traded money in the stock market, you’ve probably incurred loss to some extent. Although losses are a known risk when investing, you may perceive even small losses as failures. And when a loss is big enough, you may decide to find a different trader to handle your portfolio. After all, you don’t invest your money to lose—you invest to win.

When you lose money, you may think finding a better trader can give you the keys to the kingdom. This is understandable; however, even the world’s top investors with great trading systems incur losses on a regular basis. They know it’s part of the game, and because they understand it’s unavoidable, they can recover quickly.

What experienced brokers know

If you’re struggling with accepting small losses, the obstacle isn’t that you’re losing. The obstacle is that you perceive loss itself as avoidable. The truth is that loss is inevitable, regardless of how good your trading system is. The trick to successful trading isn’t to avoid losing altogether, but to minimize loss by identifying and correcting bad behavior, and knowing when to cut your losses and move on.

photo/ См. ниже via wikimedia commons

The market only exists because we are generating it

It’s easy to think of the stock market as an entity that exists independently of its inner gears (us) and that a winning strategy can be developed to ensure more gains than losses on a consistent basis. However, because every gain is countered by a loss, it’s actually impossible to win all the time.

Our collective actions drive the market

Vantage Point Trading explains that the market is not something outside of us, but rather the stock market is us. In reference to traders, it’s further explained that “the market is the collective movement of their actions and reactions to their own actions and to other people’s actions.”  In other words, the market is the collective movement of the traders themselves. The market has no outside frame of reference – it’s completely self-referring.

Loss drives the market as equally as gain

Going back to Newton’s Third Law that states “for every action there is an equal and opposite reaction,” it’s easy to see how this law applies to the stock market. Put simply, whenever someone gains, there must be someone who loses. The stock market can’t exist without someone taking a loss. And no matter how much you gain, it’s only a matter of time before you take a loss.

Everyone wants to win but nobody wants to lose. It may be difficult to accept that losses are an unavoidable aspect of investing in the stock market, but it’s not possible for the market to operate any other way.

Your gain is someone else’s loss

A common belief is that loss of any kind is indicative of failure, but this is not true. In fact, since the market depends on both gains and losses, when you experience a loss, someone else experiences a gain. So their gain is your loss, and vice versa.

Loss and gain are both indications that the market is working perfectly. But just because loss is an integral part of the market doesn’t mean you have to lose all the time. It just means that if you want to increase your gains, you need to have a strategy that includes knowing how to take the small losses. If you don’t know how to take small losses, you could find yourself making irrational, emotional decisions (like cutting off your trader).

Accepting loss as a risk management strategy

Senior Market Strategist, Laura Taylor shares a simple, yet brilliant reminder that “part of trading is taking losses.” Learning how to take losses is a great risk management strategy because it will stop you from making potentially damaging decisions out of frustration or fear.

While many people spend massive amounts of time and money trying to figure out a strategy to win all the time, if you can learn to do what nobody wants to do (take small losses), you’ll be far ahead of the game.

While you can’t escape loss, you can change the way you perceive loss. And when you change the way you perceive loss, you allow yourself to see its essential role in how the market functions. This provides you with the freedom to work with your traders in a way that doesn’t hold them responsible for all of your losses because you know it’s a natural aspect of how the market functions. You’ll no longer feel the need to “broker hop” and you just may see a bigger return.

Author: Anna Johansson

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