Are Large Losses Necessary?

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Recently I was having a friendly debate with a fellow trader around the nature of losses. 

His belief, and one which i believe is shared by a great many traders, is that experiencing a large trading loss (or even losses) is a necessary part of learning how to trade. 

That is for a trader to truly learn the hard lessons in trading there has to be a loss so painful that he will not forget the lesson.

We debated the merits around this argument and in the end it’s my opinion that large trading losses are not necessary however for most traders they are inevitable.

Large trading losses are not necessary however for most traders they are inevitable.

[spp-tweet tweet=”Large trading losses are not necessary however for most traders they are inevitable.”]

In a game where most traders fail, I do believe that losses and even at times failure is necessary to learn how to trade.

What is not necessary however is trauma

Understanding Trauma

Speak to any experienced trader who has been involved with and survived the trading learning curve and we can all easily re-collect one (or more) horrific losses that haunt us to this day.

In fact if one were to take a look at the DSM-5 (Diagnostic and Statistical Manual of Mental Disorders ) definition of trauma one would see that a great many traders have experienced a classic definition of trauma.

Take a look at the definition for yourself.


What I have seen in my own experience, my coaching clients, and the traders I regularly speak to is that it is very easy to traumatize someone. 

Take a lesson from trader and blogger High Probability Trader (HPT). 

Here’s an infamous clip of HPT’s meltdown circa 2008.

I’m sure HPT would agree, don’t traumatize yourself in this way.  (Warning explicit language)

It is this shared commonality of large losses and trauma that permeates through the financial markets and trading community.

So what’s the big deal you may say?

As Dr. Alvin Galves describes in, Harness Your Darkside (2012)

“Trauma creates a kind of noise, static and damage that gets in the way of us using and accessing our feelings. 

Trauma victims are unable to use their emotions effectively.  They have lost the ability to modulate their emotions.  The traumatic experience has taken that ability from them. 

Trauma victims are afflicted in 2 ways. 

On one hand, when visited by an emotion like fear, they may overreact, become excessively activated, spin up to the point of quickly going out of control and lose the ability to control their reactions and behaviour.

On the other hand, they may react to the first signs of such emotions by shutting down or protecting themselves by retreating into the fuzzy, out of touch state that is clinically known as dissociation or depersonalization.

Reacting in these ways they not only are unable to use emotions, but also can’t use their rational faculty very well.

Trauma is one of the great impediments to living well.”

Trading Fears and Poor Trading Decisions

Let’s make this pertinent to trading.

Here’s a list of fears that I commonly see across traders –

  • The fear of failure
  • The fear of being wrong
  • The fear of losing money
  • The fear of uncertainty
  • The fear of missing out

In and of themselves these fears are not an issue however as we have just seen when triggered, a traumatized trader cannot react rationally and is prone to overreact or worst yet shutdown in the moment. 

Consequently we see a great number of traders struggle with the following behaviours –

  • The inability to pull the trigger. 
  • The habit of getting out of trades too quickly.
  • The inability to respect stop losses
  • The inability to follow a trading plan

All of these behaviours while commonplace are often over exaggerated in those traders who have been traumatized.

Have you suffered a traumatic trading loss?

Now do you struggle with anyone of those listed behaviours?

If so, have you ever wondered why is that even though you know what you need to do, ie. follow a trade plan, you often cannot do it?

Now you are beginning to understand why that is.

The bad news is that if you’ve been traumatized then trying to rationalize your way out of the problem is bound to fail.

So even though you may have good intentions, you cognitively understand what you need to do, thinking alone most of the time is insufficient to change your behaviours and reactions.

After all it were that simple you would have done so already.

Awareness, Prevention, and Recovery

“An ounce of prevention is worth a pound of cure.” ― Benjamin Franklin

In conclusion I hope this article begins to create awareness around the consequences of trauma.

Even more so I think it’s important to understand that it is very easy to traumatize someone and create long lasting negative consequences.

This is well known in other performance endeavours. 

For instance in the world of combat sports it is frowned upon to send a fighter into the ring too soon.  

Heavyweight boxer Joe Louis walks away to a neutral corner as challenger Max Schmeling lies on the canvas. Schmeling’s corner surrenders by throwing in a white towel into the ring at right.

Likewise in a fight, fighters have coaches and cornermen who will “throw in the towel” when they’ve “seen too much” to protect the fighter. 

However in trading most retail traders don’t have a team to protect themselves from themselves.

So the onus falls on the individual trader to properly regulate their actions.

So where does this leave us?

If you are a developing trader your primary goal is to learn to trade responsibly by creating the structure in your trading to achieve deliberate practice without taking on unnecessary risk and needlessly impeding your development. 

First this means trading and treading lightly – trade small or reduce your position size.

  • If your P&L and trading looks and feels like a proverbial roller coaster then you’re taking too much risk. 
    • True professionals do not trade this way.
  • How do you know if you’re trading results are too volatile?  Simple, if a stranger with your PnL record asked you for capital would you entrust that individual with your hard earned money?

Second, shift your expectations. 

  • Stop thinking like a gambler and approach trading as a craft.  Slow down and stop batting for home runs.  Respect the profession.

Third, find a peer or mentor who can been in your corner and throw in the towel if necessary. 

If you believe you’ve suffered from a traumatic trading experience I would first urge you to take some time off. 

  • Often times a prolonged period away from trading is necessary, the markets will be here when you get back.

Second turn towards discomfort.   

  • You have been burnt.  Your first inclination now is to avoid all pain.  Unfortunately that coping mechanism will not give you the results you are seeking in trading.   The first and foremost principle of stress management is to never seek or avoid discomfort. 
  • Attempts to avoid discomfort and stress lead to what Rollo May calls a “shrinking of one’s world or impoverishment of one’s personality and the surrender of autonomy”.
  • Learning how to deal with anxiety and using it productively is key to self-realization.
  • Expression and creative use of one’s capacities can only occur as one confronts and moves through anxiety creating experiences.

Third, cultivate a mindfulness practice.

  • Meditation or a mindfulness practice has been clinically shown to improve the effects of trauma and to reduce he symptoms of PTSD.
  • Check out our Mindfulness Challenge For Traders here.

Finally if it the symptoms are truly severe then I would highly suggest seeking professional counselling and therapy. 

Trading is not an easy endeavour and I have a great deal of respect for any trader who has suffered a trading related trauma and has the will to get back up and try again.  

The road ahead however is often not an easy one but all’s not lost. 

Trauma need not always lead to negative consequences.  In fact on the opposite spectrum of Posttraumatic stress is Posttraumatic growthand it refers to the positive psychological change experienced as a result of adversity and other challenges in order to rise to a higher level of functioning.

And key to this higher level of functioning is an invaluable and trainable skill called resilience which is a topic we will cover more deeply in the near future. 

Till then, trade safely!

Are Large Losses Necessary?

by editor time to read: 6 min