WHEN IT COMES

to the stock market, I must confess to being a bit of an addict. Not 15 minutes pass without my having intimate knowledge of the Standard & Poor's 500's latest movements, however tiny they may be.

The market is more than just an occupation it's a stimulant. All the research reports, analysis and squawk aside, the truth is that anything can happen between 9:30 a.m. and 4:00 p.m. ET. We gurus blab about Fed policy and price/book ratios to legitimize what most of us are embarrassed to admit: The stock market is little more than a tremendously exciting, highly addictive, real-time, real-money global casino.

But while gambling oops, I mean trading can provide a "high," its druglike qualities can be quite dangerous. Just like an addict who needs his fix, an undisciplined trader will go to painful lengths to score one big play. He may refuse to take a loss, trade too big, or choose a position that doesn't offer an attractive risk-reward proposition.

As I like to point out, trading isn't about avoiding losers, but managing them. If I'm long XYZ at $25 and the stock is trading at $19, then the market is telling me that I am, at least for now, wrong. When I'm fortunate enough to have all of my faculties meaning I'm not desperate for a big score I get out of the losing position. Not necessarily all at once maybe I sell half of the position, or a third. But I certainly reduce my exposure.

That can take more discipline than you think. Indeed, even in the face of less-than-favorable odds, most people will avoid taking a loss, because it would be akin to admitting defeat. They might even rationalize not taking losses because they don't want to pay the trading commissions. Of course, nobody minds paying commissions on a winning trade, but to add a measly $10 market order to an already losing trade is, for some people, unthinkable.

Good traders, however, understand that it's OK to have losing trades. In fact, it's encouraged. Taking a small loss is the best way to ensure that you don't end up with a big one. For most seasoned professionals, the "high" comes not from winning the game, but merely from staying in it. It's a defense-first philosophy that works. The best traders focus on the losses. The wins take care of themselves.

Another common downfall of traders addicted to the "fix" is that they'll go to any lengths to score a win, even if it means taking on inordinate risk through a dangerously huge position. When they're long XYZ at $25 and it falls to $19, they double down, hoping that even a small retracement back to their original buy will get them back to even. When XYZ falls to $15, they buy even more, stubbornly insisting that it has to rally eventually. Whether it's nicotine or Nortel, this is the problem with drugs: They make you do things you don't want to do.

While there's something undeniably exciting about the adrenaline rush of a "Hail Mary," all-or-nothing approach, I'm telling you because I've tried it that it's a losing strategy that you should avoid. I blew thousands of dollars learning that it's not the losing trades that ruin you, but rather how you handle them.

Remember: Size kills. When you add to a losing trade, you're not only trading against the trend, but you're also increasing your exposure at exactly the wrong time. As your capital base is shrinking, your overall risk is expanding. That's a recipe for pain. Straight up, no chaser.

Finally, addiction to the "high" of trading will eventually tend to lead junkies to trades with less-than-ideal risk/reward payoffs. After facing a string of painful losses, most people will look for what seems to be the best "odds." They want a "win"...no matter what, and in their darkest hours will maniacally rummage through the market in search of anything that moves.

Instead of having the patience to wait for a uniquely attractive opportunity, they usually pick the crowd favorite or sure thing trades that they'd normally know don't offer attractive payoffs. This is addict behavior. To a junkie, all that matters is immediate gratification, no matter how unfavorable the odds are.

In the final analysis, it isn't looking for the high but managing the low that ultimately leads to longer-term success in the markets. For many people, trading is an emotional roller coaster but when done right, it doesn't have to be. By maintaining proper technique, you'll have a solid roadmap to follow regardless of your P&L.

Truth be told, trading should be fun, because, despite all the pundit predictions, nobody knows what's going to happen. And when your analysis proves correct, whether or not you actually made the trade, the feeling borders on euphoria. It's like heaven on earth. And that's why so many of us can think of nothing but the game.

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund.