One thing new traders struggle to grasp is that losses are part of the process. They will happen in any strategy, and a loss does not reflect your trading skill.

In fact, losses (and taking them appropriately) are actually a good sign. Trying to avoid them at all costs, however, is a recipe for failure.

This concept reminds me of my favorite game, blackjack.

You may have heard me say this before, but I grew up around gambling and have always been fascinated by probability.

My parents met in Reno, Nevada. My mother once worked as a "cigarette girl" in a casino, and my dad was a professional gambler for many years.

I learned early from games like blackjack that even when you play “perfectly,” you’re still going to lose sometimes.

The key isn’t avoiding those losses — it’s knowing how to manage them. And that’s what I want to talk to you about today.

Learn to Lose to Win the Game

What I like about blackjack is that there is a well-defined strategy.

Depending on what cards you’re dealt and what the dealer is showing, you know exactly what you should do next.

Even if you play perfect blackjack, you will still lose sometimes. (Obviously, it’s better to be the casino!) But you know your odds, especially when looking at any particular hand.

Even if you’re looking at a "can't lose" hand, you can still lose. This is what probability is all about.

You want to bet when you have a high chance of success. But placing a bet still means you have a chance of failure.

Successful players aren't happy to lose, but they understand it is part of the process. They don't get upset or take it personally. They simply move on to the next hand.

You can always identify the novice player at the table as the one who throws their hands up when they lose.

They also blame other players for “taking their cards” if they hit and get a card that wouldn’t help.

They’re emotional and don't understand the fundamental math behind the game. They’re also never sustainably successful.

I recently read a fascinating insight. Few investors talk about how they handle losing, but we see plenty bragging about their successes — especially younger investors.

Now there are a few out there (like Steven Burns and Mark Minervini) that do a great job of talking about handling losses.

Most of the noise, however, is coming from braggarts showing off their winnings. This isn’t helpful for your own process or future success.

It is the very nature of trading that you will have losses — and many of them.

If you have a strategy targeting very high returns, you will likely have significant losses. You can't have one without the other.

It hurts our ego to focus on our losses. It doesn’t make us feel good.

But dissecting our losses is one of the most complex parts of improving as a trader. It’s also one of the most important.

The Key to Losing the Right Way

It’s important that you learn how to manage your losses as a trader or investor. Keep them small. Know which ones to take and when to take them.

Managing your losses is much more important than managing your gains.

Newer traders often will not pull the trigger because they are waiting for the perfect situation. They aren't willing to take a loss.

More often than not, this results in them failing to make any gains. Remember the old lottery slogan, “You can’t win if you don’t play.”

Jesse Livermore, one of the greatest traders of all time, would often start a trade with a small amount of capital. Then if the idea worked out, he would put more money into the trade.

This strategy powers the capital allocation process of the largest and most successful multi-strategy hedge funds. Funds you have heard of, like Citadel and Millennium.

I think this is a strategy that can also work for novice traders. Start small and see if it works; if it does, add more. If not, take the loss and move on; the loss will be small.

The purpose of investing is to make gains. But the key to success is learning how to take the losses.