Home > Lessons from the trading floor > How to lose money like a professional stock trader

How to lose money like a professional stock trader

You are going to lose money stock trading. You are going to lose consistent money stock trading. The you will most likely lose money on 50% of your ideas.

Ok I ‘m glad we got that out of the way. How do you feel? Depressed? Don’t believe me? Quitting the business now?

I have been a professional trader for a long long time now and have taught, mentored and sat next to literally thousands of traders. For some bizarre reason most people focus on being “right” instead of being net profitable.

This thought process manifests itself in many different ways, more often then not I see it when a trader holds an unprofitable trade too long. One that is clearly showing the edge is gone, if there ever was an edge in the first place.

This last comment is what separates those who are pros from everyone else. I make everyone the same PROMISE when they enroll in one of our mentoring programs to trade our capital, “your biggest problem within a month or two will be exiting good trades too soon.” What 95% of the traders who I tell this to hear is “I am going to earn big profits!” What the other 5% say to themselves is “he is going to show me how to find good trades.”

Rookie traders commit capital to every idea. (by the way you can be a rookie for years if you don’t learn from your mistakes) Consistently profitable traders ONLY commit capital to high probability scenarios with an acceptable reward to justify the risk. Profitable traders lose money on good ideas.

They know that if they make enough good decisions over the month they will earn money. They don’t personalize trades because they don’t need all of them to earn money. They take losses according to their plan and when a trade works out they earn more than enough to cover those accepted losses. We call these accepted losses a business expense, spending money to make money.

So what is the magic bullet that struggling traders seem to never get? They don’t consider trade expectation enough. Sure they have heard of it, we talk about it all day every day but it doesn’t always sink in. Struggling traders just want to get in, if they feel they can justify the risk they mistakenly believe they are making a good decision. They don’t consider on every trade does the potential reward justify the risk?

In order to get paid you need for a large sample of your trades to have great profit potential. You don’t need ALL of them to produce great profits but you definitely need the potential. If you take every potential short term entry only weighing the risk and not the reward potential also, your trading account will have a many small “paper cuts” with very limited chance of scoring a big trade. If you get one it was because you were lucky. You don’t want to be lucky, you want to be good. You want to expect to earn money.

You don’t care on a trade by trade basis if you lose money because you are losing money on good ideas that don’t follow through. We see this most evident on our risk manager every day. When the market or a particular stock is “obvious” as we teach in our Equity Trader 101 course 98% of our traders (both students and full time prop traders) are earning money.

When the market gets choppy or in other words the trade expectation for significant follow through is diminished the rookies continue to place trades because the risk is measured without consideration for profit potential and the profitable traders are “flat” or doing nothing waiting patiently for the trade expectation to improve.

The bottom line is profitable traders allocate capital to high probability scenarios with both an acceptable risk and a great potential reward to justify the risk (accepting the potential loss on a good idea). Unprofitable traders do not consistently enough weigh potential profit and therefore are in too many trades.

We saw this yesterday when the market clearly offered nothing more than a potential re test of the support for the last 2 days yet many traders continued to short sell with limited upside. The proper trade was to short sell new lows which presented a much better opportunity for higher rewards.

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