Every trader has moments of glory and moments of despair while trading in the stock market. A sudden big profit gives us a feeling of euphoria, we feel top of the world only to come crashing down next day, next week or next month. Then we start wondering whether we are in a right place doing the right things or is it all wrong.

Such experiences are repeated multiple times. We learn to live with these ups and downs and learn to draw some lessons from the experiences, pleasant or otherwise.

Profit and loss both teach us something. Losses actually offer better lessons if we care to learn.

Two years ago, I had written this on Quora.

Sharing it here today as the views remain relevant.

What invaluable lessons does one learn when he/she starts stock trading ? :

There are already many answers posted to this question. Here are my two cents:

I have always maintained that stock markets are a microcosm of life in general. Each day of trading gives you chills and thrills, highs and lows, victory and defeat and a lot more. The profit and loss look good or bad on your balance sheet but the trading takes a toll on your psyche as well. You are always high on adrenaline when in the rush of trading, making instant decisions which can give you money or burn a hole in your pocket.

There are lessons to be learnt from trading. Every person is different. So lessons learnt will be different.

Here is what I learnt:

Do not put all the eggs in one basket:

Whether trading or investing it pays to be diversified. One can go wrong heavily in a single trade. Allocation to different stocks helps in mitigating that risk.

That is why experts never tire telling you about virtues of diversified portfolio.

Do not bite off more than you can chew:

This is about the trade size.

Never take a position in the market disproportionate to your capital in the hope of a windfall.

Lotteries do exist in the market and at times you may get lucky.

But more often, you will only keep chewing and not getting anything to eat.

The big position size can cause a big loss which will reduce your capital and thereby your trading ability and confidence.

Try not to risk more than 5% of your capital in a single trade.

( This is just an indicator figure, one has to find own comfort level )

Trade with the money you can afford to lose: ( Really ? )

The statement above is the conventional wisdom.

Then there is another advice from one of the greatest masterminds:

With greater risk one can look for greater rewards. But one can be wiped out as well.

Markets are not one day event. The situation there is not like war.

It is like daily skirmishes where you will be bloodied one day and be a victor next day. So do not bleed out in search of glory. There is always a next day. Learn from small losses. Occasional big loss will eventually come some day to test you. Do not go looking for it. That is asking for trouble.

I am personally of the opinion that I can not classify my money as something I can afford to lose.

If I classify it that way, I have already distanced myself from money and it will surely find a way to go away from me.

I trade with the money I can not afford to lose. That makes me take my trades seriously. They are not for some entertainment or ego trip. Trades are there for making money. Some will go wrong, but the right ones have to make more money than the losing ones are taking away.

One has to strike a balance in risking the money.

The above advice is a good lesson to be learnt.

Go with the trend- Trend is friend :

There is money to be made by being a contrarian i.e. by going against the market trend. For that to happen you need perfect timing and a good dose of luck.

For a normal good trader, it is best to follow the trend.

Be a buyer when the markets are moving up and do not hesitate to be in short trades when the trend is down.

It is similar to swimming with the current or against the current in a river.

Do not struggle unnecessarily.

But get out of the trade when the trend reverses.

Patience pays: Stay with the right trades:

In almost all my answers about trading ( whether day trades or positional, futures or options ) I have always emphasized on patience with your winning trades.

These are the trades which will generate the surplus which shall keep you afloat. Big profits are good for the trading psyche also.

One big profit should be able to take care of many small losses.

For more about the patient trade example one can read here:

Pramod Kumar’s answer to What rules are to be followed in order to do intraday trading?

Remeber what Jesse Livermore , one of the greatest wall street traders said about being patient:

These were the five important lessons I learnt from my trading.

Now the second part of the question:

How does loss affect one’s perception of the market and his/her investment strategy ? :

This is a very relevant and important issue.

One can be devastated by a big loss caused either by incompetence or just by sheer bad luck.

It is difficult to come out of that remorseful feeling.

My views on the issue are summed up in my another answer, part of which I am reproducing here:

Losses happen when you are wrong.

Big losses happen when you ignore the trading plan and the loss management.

The feeling at the time of a big loss is of deep despair, regret and self pity.

It is easy to give in to these negative emotions.

But it is important to fight it out and come on top.

No big success was ever achieved without a struggle.

Failures are stepping stones to success.

It is important to learn from the mistakes and the losses.

Another answer about loss impacting one’s trading is here:

Pramod Kumar’s answer to How do you recover your morale after a loss in stock trading?

To Summarize:

Markets teach us many life lessons.

We should pay heed to what the market tells us.

One should have a dream but live in reality. Be consistent and be persistent.

Look within yourself for answers to all the doubts and questions.

There lies the secret of success.

Thanks for reading.