Welcome to Trading With Larry Benedict
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Daina’s note: During Monday’s interview, Larry gave readers a glimpse of how fear and greed impact trading. He also detailed the importance of experience and practice as a trader… and how it can lead to finding your “trader’s intuition.”
Today, we move on to the importance of taking a loss – something every trader experiences sooner or later…
As Larry says, learning how to lose is “the most beneficial thing a new trader can learn”…
Daina Schnese: We finished off on Monday talking about the importance of knowing how – and when – to take a loss.
Of course, losing isn’t the most exciting thing to talk about when it comes to money… But why is learning how to take a loss so important in trading?
Larry Benedict: Nobody wants to lose their money on a trade. Especially me… I am the toughest human being on myself. Back in the day, when I ran my own fund, I was crazy about being hard on myself.
And really, at the beginning, it was so competitive… I just wanted to win so bad, and I’d beat myself up about any and all losing trades.
But, when it comes to trading, it’s inevitable that you will have some losers. So, the best thing you can do as a trader, especially a new trader, is to accept this… You must accept the finality of a loss.
That’s something I still struggle with. But, as I’ve gotten older, I’ve gotten less aggressive.
Daina: What do you mean by accepting the finality of a loss?
Larry: What I mean is there’s always more trades out there.
This is a critical mindset to have while trading. Let’s say you have a bad trading day on Monday. Accepting the finality of that loser of a day is being able to come back Tuesday as if you were even… or as if you hadn’t lost anything.
It’s like football, or any sport really. If your team loses one game, you don’t hold onto that loss and carry that negative mentality into the next game. You study what you did wrong, take that wisdom with you, and apply it to your next game.
It’s all a mindset you develop. After a bad day or a bad trade, all you have to do is come back to putting a P [profit] on the page. That’s slowly letting profits trickle back in, one good trade at a time, with smaller position sizes, until you work yourself back to a pile of capital you feel comfortable with. Once you start bringing in the steady profits again, that’s all that matters.
Daina: Why do traders get stuck on one loss when they can just as easily get back to slowly making profits?
Larry: It has a lot to do with greed, which we talked about last time. People hold on, even if the trade is going against them, because they just want to make money. Greed can get in the way if you’re up on a trade and keep pressing instead of taking profits, and it can come into play when you’re holding on to a loser in hopes it will turn around.
But like I said, there’s always more trades out there. Reminding yourself that “this isn’t the trade that’s defining my career” is an important step. For traders, it’s hard to understand that one bad loss doesn’t define you. More opportunities to rebuild capital are always right around the corner.
Plus, it’s refreshing to get out of a losing trade. It’s over and done. When you’re sitting in it every day, it weighs on you. A lot of new traders think that if they lose once, they’ll never make that money back again.
Once you realize no matter what you lose, you can always come back, letting go of losers isn’t a problem.
We always talk about position sizing… You never go broke taking a profit and you should always put on a position size that you feel comfortable with. Especially when it comes to options, that means you feel comfortable potentially losing 100% of the money you put towards the trade.
Because at the end of the day, it’s all about how much you’re putting towards each trade. When I was on my way to the top as a trader, no matter what my loss was, I knew I could make it back. That was key… No one could ever take me out because I always had the largest chip pile. I never went anywhere close to all-in on one trade.
So, my advice is this: Get past the fact that you’re losing or took a loss, make the loss final, and know you can go back to the grindstone tomorrow and make back those profits with a few winners.
Daina: What exactly did you change in your trading strategy to make sure you weren’t holding on to those losers anymore?
Larry: Like I’ve said, it took me four or five years to really figure it out. I had to burn through my capital a few times early on in my career to realize I couldn’t let my emotions get in the way of just letting a loser go.
When I finally figured it out, it was because I applied discipline. I was like a wild stallion when I first started trading… making impulsive and crazy moves at times. And then I learned the importance of keeping a strict discipline and sticking to it..
That’s why I consider the third pitfall new traders fall into to be a lack of discipline. And just like the first two pitfalls, not earning your risk and going for the home run on every trade, I lived it and learned it myself.
Daina: We can dive into the third and final pitfall new traders fall into, a lack of discipline, next time we sit down. Thanks for your time today, Larry.
Larry: No problem.
Daina’s note: Next time, Larry will outline the third and final pitfall new traders fall into: They lack discipline. This includes three important steps to learning and applying a trader’s discipline.
Larry will also give his timely take on what he sees ahead in the markets and how he’s looking to trade it. So keep an eye on your inbox Monday morning for your next issue of Trading With Larry Benedict.
About Larry Benedict…
Larry is a former hedge fund manager with over 30 years of investing experience. He’s also known as one of the world’s best traders… and for good reason.
From 1990 to 2010 – when he was actively running hedge funds – Larry never had a single losing year.
Larry’s market commentary is frequently featured in Bloomberg, Barron’s, and The Wall Street Journal, among other major news outlets.
That’s why we’re publishing this limited-edition interview series over the next couple months. When we saw what Larry could offer to everyday investors, we knew we had to share everything we could with you.
If you have any comments, questions, or suggestions about this free e-letter, please drop us a line at [email protected].
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