How to deal with trading losses

I’m not sure if you guys have discovered Gatis Roze, one of the newer bloggers over at StockCharts.com. I mentioned his new blog back in the Spring, and he certainly did not disappoint. He’s been pumping out blog post after blog post. And since I read a ton of technical work everyday, it’s nice to sometimes sit back and enjoy more of a philosophical discussion on trading and investing.

One of his recent posts at The Traders Journal – “How I Deal With Trading Losses” is a must read. Here are a few things that stuck out to me:

As I see it, there are two types of losses.  The first type of loss is simply a result of the laws of probability and is to be expected if you follow your methodology.  I tell my classes that I lose about 4 out of every 10 trades.  The novices in the class react by asking themselves why they are taking an investment class from such a loser. The experienced investors nod their heads in approval.  The point is that when I lose, I cut my losses quickly to minimize the costs. When I have a winner, I let it run.  It works out to be a net positive as the winners more than compensate for the losers.  For you sports fans, another way to look at it might be to ask:  how much would a baseball team pay me if I hit only 6 out of 10 times at bat?  (more)