The best traders aren’t necessarily the ones who are right most often. They’re the ones who know how to be wrong without paying too much for it.
Let me ask you something. What’s one thing every trader hates?
Taking a loss. I’ve been involved with the markets for over 36 years, and I still don’t enjoy it. I doubt I ever will.
But learning to take a small loss—without second-guessing, bargaining, or making a big production out of it—is one of the most valuable skills a trader can develop. It isn’t glamorous, and nobody brags about it at the barbecue. Yet it’s one of the habits that can keep you in the game for years.
Why Small Losses Matter
Think about a football team. The coach calls a running play, and it gains two yards. Or maybe it loses two. Does he panic? Of course not. He moves on to the next play. A short gain or a small loss is simply part of the game.
Now imagine a coach who refuses to punt. He keeps calling the same failed play on fourth down because he’s convinced it will work this time. Before long, his team is in trouble.
Holding on to a losing trade can look a lot like that. A small loss is a play that didn’t work. A large, uncontrolled loss can put the whole game at risk.
And the math gets ugly in a hurry. Lose 10% of your account, and you need a gain of about 11% to get back to even. Lose 50%, and you need a 100% gain just to recover. The deeper the hole, the harder it is to climb out.
Taking small losses helps keep that hole shallow. That’s the point.
Why We Hang On to Losing Trades
If small losses are so important, why do smart people have such a hard time taking them? Because we’re human.
First, nobody likes being wrong. We take it personally. Instead of accepting that a trade didn’t work, we start telling ourselves stories: “It’ll come back.” “I just need to give it more time.” “The news is bound to change.”
Then there’s the idea that a loss isn’t real until we close the position. It may feel better to call it a “paper loss,” but the account equity has already changed. Leaving the trade open doesn’t make the risk disappear.
And finally, there’s hope. Hope is a wonderful thing in everyday life. But when it comes to managing a trade, hope is no substitute for a plan.
Here’s something I remind traders about from time-to-time: The market doesn’t know you’re in the trade. It doesn’t know your entry price, and it certainly doesn’t care how badly you want a turnaround. Price will do what it wants to do, with or without us.
How a Professional Views a Small Loss
One of the biggest changes you can make is to stop viewing every loss as a failure. A planned, manageable loss is a cost of doing business.
Think about the owner of a neighborhood grocery store. Some produce will spoil before it sells. A few bananas will turn brown. Does the owner stay up all night being angry at those bananas? No. A certain amount of waste is part of running the store.
Trading has costs, too. When a setup fails and you exit according to your plan, you’ve paid one of those costs. You can review what happened, protect the capital you have left, and be ready for the next opportunity.
I once heard a hedge fund manager say, “If you’re not taking losses, you’re a loser.” While it may sound a bit harsh, it’s a memorable way to make an important point: Taking a loss doesn’t make you a bad trader (or a loser). However, refusing to accept one can lead to far bigger problems.
So when someone claims they never take a loss, I get cautious. Consistent trading isn’t about avoiding every losing trade. It’s about knowing how to handle the ones that don’t work.
Build the Habit Before You Enter
The easiest time to make a clear decision about risk is before your money is on the line.
Experienced traders identify the price level that would tell them their trade idea is no longer valid. They make that decision while they can still look at the chart calmly—not after a position starts moving against them and emotions take over.
A few habits can make that process easier:
· Know your exit before you enter. If you can’t identify the point where the setup is no longer valid, you may not be ready to take the trade.
· Let the chart define the stop. Use meaningful price structure to identify where the trade idea is wrong. Then size the position to fit the dollar risk you can accept.
· Keep the risk manageable. If an ordinary planned loss would keep you awake at night, you may be trading too large.
· Write the plan down. An exit you decided on in advance is much harder to argue with when the market starts testing your nerves.
None of this means you’ll be right on every trade. You won’t. The goal isn’t to predict every move. It’s to be prepared when the market proves your idea wrong. And remember, a stop order is a risk-management tool, not a guarantee of an exact exit price, especially in a fast-moving market.
One Final Thought
Taking small losses will probably never be fun. But there’s a certain freedom in knowing, before you enter, what you’ll do if the trade doesn’t work.
You spend less time fighting the market or staring at every tick. You can take a walk, mow the lawn, or enjoy dinner with your family knowing you’ve already made the important decisions.
Here’s how I look at it: The first loss is a small bill. The big loss is often the one you refused to pay.
So pay the small bills, my friend. They’re part of the price of staying in business.
— Jim Prince, CommodityTrends.com
*Educational disclaimer: This post is for educational purposes only and is not investment advice or a recommendation to buy or sell any futures, options, or other security. Trading futures and options involves substantial risk of loss and is not suitable for everyone. Past performance is not indicative of future results. Always do your own research and consider your own financial situation and risk tolerance.
