One of the oddest things that I observed in my 20 years as a professional is this: most people will focus, sometimes to the point of obsession, on the one or two losing positions they have while completely disregarding the overall performance of the portfolio or the position size of the losing position.  Moreover, most of the time they haven't even REALIZED the loss, they still hold the position and it's only a paper loss.  While there are many things that are wrong with this type of thinking perhaps the worst result is that most investors will then make future trading decisions biased by their few "losing" positions.  

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If you want to be a trader, then you must begin to look at each trade as just one trade, one attempt and not use any single trade as a datapoint to consider when considering a new trade.  You must let the law of large numbers work.  As an example, think of a baseball player.  The most successful hitters know that it's just one at bat among hundreds.  They know that if they just do the same things over and over again, they will be successful, assuming they have the talent to be in the "Big Leagues."  It is not different with trading: it is one trade amongst hundreds of total trades.  Focusing on one trade and then extrapolating that out into the future as predictive of your future performance is dumb, both having an overly optimistic view or an overly pessimistic view.

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My current "losers" are BAC and VIX.  I have lost money shorting the SPY also.  But these have all been longer term macro trades as opposed to my swing trading that makes up 90% of my trading.  

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Macro - Fundamental Trades

When I talk about trades based on the fundamentals of a company or the macroeconomic picture of a region or economy, I am almost always talking about trades at least 6 to 12 months in the future.  Therefore most of the time I will adopt an "All or None" loss position meaning I am willing to lose 100% on that trade.  However, I also have a history of significantly outperforming the market on an annualized basis so taking a 100% loss of a 4% to 8% position is not going to severely impact my returns.  

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After I have done my analysis and decided that there is a macro or fundamental reason to enter a trade, I approach the trade as follows:

• I want to establish a "starting" position as soon as possible.  I do this in case the longer term macro picture comes to fruition suddenly due to an outlier event occurring.  In simpler terms I want to have a small position in case something happens.

• I then look to longer term price action as well as updated macro or fundamental data points when considering whether to add to my trade.

• I DO NOT CARE ABOUT THE STARTER POSITION; If I lose all of that money from that trade, then I am fine with that.  

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But the one thing that I do not do, that I absolutely think is bad for the brain and worse for successful long-term performance is to constantly monitor the value of that macro starting position.  Furthermore, once I am in a macro trade full allocation, I STILL IGNORE the P/L on that position.  Why??  Because the thesis for that trade is macro and therefore it is longer term and therefore it's going to take longer time and therefore there will be price volatility and therefore you will very likely be at a "paper loss" for much of the trade.

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I was reading about this year's leader of the US Investing Championship, and this was his philosophy about losses on EVERY TRADE he takes, and he uses options: he assumes a 100% loss for every trade he does.  Yup.  100%.  His belief is that setting stops limits you when using options since they move more than the underlying.  His view is that by accepting a 100% loss at the beginning it frees you up to emotionally give the trade time to work.  Interestingly as I read through his methodology, he shared many of the same core principals.  For example, he also sets his durations at 2x his trade thesis and he doesn't get caught up in the Greeks.  

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I digress. Here's the deal.  Actually, there are two: if you are going to take longer term trades using options, then I would agree that accepting that the trade could produce a 100% loss prior to entering is key.  Of course, you will position size correctly and use TA for optimal entry and exits so in reality, all you are changing in the methodology is your loss estimation.  Secondly, you MUST remember your thesis and STICK TO IT as long as the incoming data supports to do so; if your thesis is 6 months and its been 2 and your trade is red but the thesis catalyst has not occurred yet then STOP LOOKING AT THE PAPER LOSS!!!

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Seriously, if you have positioned sized correctly then what the heck are you obsessing about??  So much of trading is mental and mental control.  Yes, emotional control is huge but being able to mentally control what you think is almost as important as controlling your emotions.  

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Look, I get it.  No one "likes" to see losses on paper.  But for the love of God if you are going to talk to yourself about the paper losses you see then you had better be devoting the same amount of time to celebrating all the paper gains you have.  EXACTLY - that would be stupid because you haven't REALIZED those gains yet.  Guess what? You haven't REALIZED those losses yet because the trade thesis has not completed yet.  

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STOP obsessing over losing positions.  If you have position sized correctly and if you are using the right tools and methodology, then what the heck are you worrying about?  It's one trade.  Retail obsesses. Pros do not.