Some people believe trading is like gambling. It’s not. In gambling game, you have to participate to lose and do absolutely nothing to stop losing. If after one bet you don’t put another bet on the table, you will not lose. There is also no way you’ll win. But, at that point (if you don’t place another bet), there will be no risk. Obviously, in trading it’s very different. You must participate to get in trade and you must participate (in other word do something) to cut your losses. If you do nothing, the possibility exists that your entire account can be wiped out. And even that won’t stop your losses if you still do nothing.
Although, at that point, your broker will most likely participate for you by getting you out of market. In gambling, you know exactly what your risk is and the game always ends before the next one starts. But in trading, you don’t know beforehand exactly what your risk is. (You may have an idea, but even with stop orders there is always the possibility of slippage.) But the real big difference between gambling and trading is the event never ends as the market keeps moving.
A good example of an active winner and loser might be a person playing blackjack at a casino. You must make conscious choice to play and risk your money. And when the game is over, the rules force you to be an active loser. If you want to play and risk your money again, you must place another bet. Without another bet, you can’t be a loser again. You must actively participate to lose and do nothing to stop losing, the exact opposite of trading.
This is why (in Trading) being an active winner and an active loser is so important. But because the event never ends, it’s easy not to be active winner or loser. There is always the possibility (no matter how slim) of the market coming back in any trade you are in. You don’t need to actively participate to get back your losses, you could simply stay with the trade and let the market come all the way and give you back your losses.
Because of this reality, there’s always a constant temptation not to cut your losses. Cutting losses for many traders is painful. So many choose to avoid the pain and not be an active loser. They simply think they are in a winning trade that is yet to show profit. Or we will look at only the evidence that says our position is right and ignore the rest of the evidence against that notion. These are obviously the traits of someone who is not an active winner and loser.
But being an active loser (as well as an active winner) is the only way to be successful. Again, the temptation to not cut your losses is always there. But it will do nothing but get you in trouble. Successful traders know that cutting your losses actively, before they get too large and unmanageable is the only way