The Big Loss

At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders (downtowntrader). His post is titled:

Learn to Lose Money to Make Money


The majority of people reading this are not profitable traders. If I could single out the most common culprit for sabotaging your trading it would have to be not being able to take a loss. This is especially prevalent amongst new traders… out-sized losses are what cripple your account and push you into the negative column. You will never be a successful trader, EVER, until you learn how to take a loss.

The problem is that many traders equate a losing trade with making a mistake. This is simply the wrong way to look at it. A trader should judge his trades by grading the process, not the results. There are simply too many unpredictable variables impacting whether a trade is successful or not. [MDW: I’ve said this repeatedly]

Doubling down or holding on to a losing position for fear of taking a loss will eventually lead to your ruin. This will work at times… However, the problem is that the few times it doesn’t work out will lead to huge losses. Some stocks DO go to zero and stocks dropping over 20% in a day are not really uncommon.

Stocks don’t always come back and even if they eventually do, you could have been better off looking for a better opportunity. You wouldn’t keep your money in a shoe box so why keep it in a stock that’s going nowhere? Traders should focus on the process and in striving for perfection in the mechanics of a trade instead of worrying about the results. Make sure you have a plan and execute it flawlessly every time. This means only entering a trade for which you know you have an edge and then exiting at a predetermined price or condition when it goes against you.

If you take your losses religiously and focus all your effort on minimizing the mistakes in your trading process, you will undoubtedly improve as a trader. In fact, it would be damned hard to be a losing trader if you truly embraced this simple rule. Remember that taking a loss doesn’t mean you were wrong. The probabilities simply didn’t work out in your favor.

Joey is talking about stock trading, but his observations apply to option trading as well. Most of us have the ability to be profitable, and those who last a long time must show some income for their efforts. But there is something about human nature that makes it difficult to accept a loss, or even recognize how dangerous a given trade has become.

A trade plan places the number in front of your eyes: the dreaded maximum permissible loss. Most traders fail to use the trade plan in the first place, and then a certain portion of those who do refuse to accept their earlier decision as the correct step to take. It’ so tempting to try to get back to even, when all you are doing is gambling.

Trading is a game of statistics. When you have an edge, you will win. When the edge disappears, as it inevitably must for some trades, then giving up and not fighting the statistical truth is the only winning action.

This philosophy is not hindsight speaking. If you regularly limit losses, many times it would have been better not to act. But that’s not the point. The point is the only way to avoid the big loss is to take that loss when it is small.

As I was finalizing this post, Darren echoed the same theme at his blog: (Attitrade-ProactiveTrading)

By simply writing out my target and stop (amongst other things) before placing a trade I became more mechanical in my trading. If my loss target was hit I moved on to the next trade then processed the losing trade later in my journal. Losing sucks but what really sucks is losing more than I should by not following my rules. The mental baggage that will be carried from knowing better yet lacking the discipline to do so, my friends, is the real damage from a loss.

I know that it’s difficult to take advice offered by others. We all feel we must learn our lessons by ourselves. Let me assure you that I would be a whole lot better off today had I bothered to pay attention to the great advice offered to me. Now it’s your chance to learn from those who have been there – or were smart enough never to have gone there.


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12 Responses to The Big Loss

  1. Steve B 02/17/2011 at 10:38 AM #

    One of the best lines I ever read regarding losing trades was “It is not bad to be wrong, it is bad to stay wrong.” Meaning, as the article and Mark always state, you will never have a 100% success rate and expecting so is ludicrous. But don’t stay wrong. Having a losing trade is not bad, it is stayign in a losing trade that kills you. One of the hardest things I struggle to learn each and every trade.

    • Mark D Wolfinger 02/17/2011 at 10:51 AM #

      Thanks Steve B

      I know that this is crucial advice and I’m with you 100%.
      I know that everyone understands the advice.

      Yet, there is the ‘hope’ that if the trader just holds out for another five minutes, or allows the loss to increase by another $$0.10 before pulling the trigger , or (insert any excuse) that the loss will begin to disappear.

      That’s the real problem. How can anyone convince traders to avoid that psychological hurdle by believing in the necessity of taking those losses? That’s the challenge.


  2. Steve B 02/17/2011 at 11:05 AM #

    That is the question of the century. But I like to think of it like this… baseball players get paid millions to get a hit 33% of the time… so maybe a 60% win ratio isn’t so bad. 🙂

    • Mark D Wolfinger 02/17/2011 at 11:11 AM #

      Steve B,

      Not being an in-and-out day trader, I’m not certain. However, 60% seems to be a very good result.

      As a patient premium seller, I need better than that to do well. But my losses are set higher than yours (Maximum profit is about 2/3 of maximum loss).
      If you achieve a 60% win rate, you would be extremely profitable (profit target is approximately twice maximum loss).

  3. Steve B 02/17/2011 at 12:29 PM #

    Oh, I was just merely using numbers. I mean we consider a baseball player great if he gets a hit 33% of the time. A quarterback or basketball player great if they make 50% of their shots or complete 50% of their passes and yet we as traders expect to be right 100% of the time. If you sit back and think about it, it is silly. Unfortunately, human psychology gets in the way and we think we can’t be wrong to be successful.

    • Kamal 02/18/2011 at 12:40 AM #

      Oops, Mark…Apologize, I missed adding one crucial piece of info in my question below…

      When I say I sell credit spread, forgot to say that I sell both sides, that is I sell Puts & Calls far month (60 – 90 days) OTM….

      • Mark D Wolfinger 02/18/2011 at 8:09 AM #


        That changes nothing. However I have some advice: Once the position is open, forget that you own a iron condor. You have two separate positions and I believe they must be managed separately. One call spread and one put spread. Do not count on the tiny gains from the winning side to be of any help when you have a losing side that is in trouble.


  4. Kamal 02/18/2011 at 12:13 AM #

    While at the topic of choosing between holding onto a losing trade, or to stop losses by closing that position, may I ask you a related question, Mark?

    I am a novice options trader and I trade options of ‘Nifty’, an Indian stock market index.

    What do you suggest will be appropriate method for using as a Stop Loss?

    Let us say, I sell a credit spread, far (60 – 90 days) month, Out-of-the-Money, when I believe that market will get into a trading range. My intention is to hold onto both sides, as long as possible, not necessarily to hold on till expiration.

    In such circumstances, I have noticed that even though market does get into a range eventually, in the immediate period after my entry, I have noticed prices fluctuate that makes my position get into a loss.

    Now, if I need to decide whether to cut my loss & get out, or to hold on, on the belief that since this is a far month OTM strike, underlying index’ price may not reach there eventually when nearing expiry.

    Here, my method is to decide holding on / exit based on the option’s price; not on the underlying’s. Is this a right method?

    • Mark D Wolfinger 02/18/2011 at 8:06 AM #


      It’s a reasonable method. Keep in mind that there is no ‘best method.’ When you pay attention to the option prices, then you are tracking your profits and losses. If your mindset is: ‘It’s still OT, I’m safe’ then this is not a good method for you. If your mindset is ‘I don’t like this, but my loss is still at an acceptable level – not beyond my limit – and I still have true confidence (not a hope) that the trade will work out,’ then it is not terrible to hold. But do consider a compromise. Buy back 20% of the position. If you trade one-lots, then you don’t have that option available.

      1) If your position ‘gets into a loss’ most of the time, consider entering half the position early, and the other half when you can get a better price for the spread. Or perhaps you will choose different strike prices for the second portion.

      2) I do not recommend entering a stop loss order for option traders. This should be a mental stop loss.

      3) Your choice does not have to be to ‘get out.’ You are not trading stocks. There are alternatives. One is to reduce size by buying back a portion of the original trade. Another is to make a risk-reducing adjustment trade.

      4) It’s not a problem of whether the market will reach the strike price – it’s a problem of how much pain are you willing to take when the options become not very far OTM. As losses mount, the probability of incurring the big loss increases. That’s why we exit and take a loss. It’s not because we expect the options will finish in the money. It’s just that the chances of that happening have increased since the trade was opened.

      Bottom line: If you are comfortable with the loss to date; if you are comfortable with the loss potential if the Nifty moves another couple of percentage points in the wrong direction, then holding is okay. But if you are nervous over the trade; if you’ve done this before with bad results, there is no reason not to give it up – and reinvest the money into a safer trade.

  5. Kamal 02/18/2011 at 8:44 AM #

    Thanks a lot, Mark….Very kind of you….

  6. James Lindberg 02/25/2011 at 9:04 PM #

    Clicking the button to send an order locking in a loss is one of the hardest things for me to do. Recently I’ve journaled my feelings right after this and they are so deep and complex. Shame, disappointment and fear of failure are very powerful emotions. They are coaxed out at the click of a button or the flash of a quote.

    I thought learning the mechanics of options trading would be hard. It really wasn’t, your blog and book has helped with that. It’s the mental aspects of trading that have become far more important to me now. That seems to be the real ‘battlefield’ on which the wars of profit and loss are fought and, ultimately, won and loss.

    Thanks for keeping these types of issues before us on your blog.


    • Mark D Wolfinger 02/26/2011 at 7:35 AM #


      Thanks for your insights.

      It’s so very true. And it’s not something I was paying attention to in the early days. I would roll and roll again to avoid finalizing a loss – just ‘knowing’ that eventually all would end well. That is obviously a foolish thought. Yet I had no idea just how foolish.

      Even after blowing up my account – more than once – I was unable to see the flaws in my thought process.

      I now understand this clearly and want to share my experiences with others. That’s why I write of this so often. Yet, the bottom line is that most traders cannot learn certain things until they experience the situation personally.

      It’s not whether a trade results in a loss that matters. It’s: how safe is your account? Why take a big loss over ego? Many trades will lose money – accept that fact and move on. I know, easy to say, more difficult to do.

      Here’s my advice, and it’s not easy to follow: Keep good records of your trade and a journal of your thoughts. But ‘forget’ the numbers while then position is open. Forget the entry, forget the break-even. Just trade the risk. You want to own the position as is, or you don’t. It requires an adjustment or it doesn’t. You can figure out whether it was a profit or loss once the trade is closed.