When is it Okay to Lose $1,000?
Beginning traders tend to get very upset when they experience a losing trade, and while this is a natural reaction, it is counter productive to profitable trading. Due to the way that our society functions (i.e. we all need money to live), the emotion that is associated with losing any amount of money is very strong. If this emotion were positive for trading, it wouldn't be a problem. Unfortunately, the anxiety that is associated with losing money is not a positive emotion, and usually causes us to make mistakes that lose even more money. If just reading about losing $1,000 gives you a tight chest or sweaty palms, you need to keep reading, and hopefully you can learn that losing money is part of trading before your emotions blow up your trading account.
Professional traders also experience losing trades, but they do so without over reacting, because they have the knowledge and discipline to accept them and stick to their trading system. To answer the question, it is okay to lose $1,000 on a losing trade if a winning trade will make $3,000 (i.e. a net profit of $2,000). This applies on a per trade basis, or on a daily basis (e.g. losing $2,000 one day is acceptable, if you usually make $5,000 per day). The key to this is being consistent and sticking to your trading system. If you have tested your trading system, and you know that over the long term (weekly, monthly, etc.) it makes a decent profit, you have nothing to fear from a losing trade or a losing day.
While we are on the subject of losing money, a quick word of advice. New traders find it hard enough to accept, and non traders will never understand that losing trades are part of trading. Therefore, do not try to explain to your wife, husband, or partner, that you have lost $1,000 today. Even if this is technically a good day (e.g. a very small loss by your trading system's standards), saying that you only lost $1,000 with a smile will not help. So, avoid the additional stress, and keep your losing trades (or losing days) to yourself and other traders.
Comments
Another way I like to explain “losing days” is to think in terms of a business. For example, when you buy a gallon of milk for $4 at the grocery shop, it is not $4 gross profit in the pocket of the owner. Out of that $4 comes the cost of doing business – the direct cost of the milk, employee wages, rent, insurance, electricity etc.. The same with trading, any “wins” (operational income) are used to pay off the “losses” (operational expenses) and what is left over is your gross profit.