It’s impossible to trade or invest and not
find yourself into a losing position.
That’s just the way things are.
And a large trading loss can be devastating
— not only financially, but emotionally.
As defeating as losses feel, how you react
to a big loss is more important than the loss
itself.
Inexperienced traders suffering a large loss
can become hijacked by their emotions.
Some may try to trade through the pain, often
creating more turmoil for themselves.
Some may withdraw from the market, to avoid
thinking about it.
Others may try to “trade in revenge,”
determined to recover the losses.
None of these reactions are constructive.
In fact, they can be destructive if you don’t
learn how to handle losing trades.
Whether it was an obvious minus in your strategy,
a lack in discipline, or any other reason,
nearly every trader will face a big loss (or
several) in their career.
After a losing streak or big loss, you may
begin to question yourself, which leads to
the typical problems many new traders have,
like getting out of trades too quickly, holding
on to them too long, skipping trades with
the fear of losing, or getting into more trades
than you should in an attempt to get some
winning trades.
One major difference between successful traders
and failed ones is how they handle trading
losses.
Successful traders treat losses as an opportunity
to learn and improve their trading.
Coming back from a large loss is challenging,
but success is never accomplished by ignoring
trading losses.
Losses — especially substantial ones — can
be opportunities to become a more skillful
trader.
Here are 7 rules successful traders take after
a loss to become emotionally stronger and
more disciplined:
1.
Never let a bad day cost you more than you
make on an average win day
Knowing how to lose properly is a must in
a long and prosperous trading career.
If you average, let’s say, $200 on your
winning days, don't lose much more than that
on a bad day.
Control the downside.
Knowing how to minimize risk is the most important
aspect in trading.
There are really only 4 possible outcomes
to a trade or investment: A big win, a small
win, a small loss, or a big loss.
As long as we ELIMINATE the big loss from
our trading days, we can live comfortable
with the other three.
Risk Management is the primary cause for a
successful or unsuccessful trading experience.
A sound risk management can yield a steady
increase of profits, while a poor risk management
can wipe out an account in a very short period.
If you follow the 1% risk per trade rule,
a precise stop loss level presets that 1%
value and you’d know beforehand the amount
you risk losing should your trade turn negatively.
And this goes hand in hand with the second
rule.
2.
Know the stop-loss level before you ever get
into the trade
The stop-loss is a simple tool, yet so many
traders and investors fail to use it.
Whether to prevent excessive losses or to
lock in profits, nearly all trading styles
can benefit from this trade.
Think of a stop-loss as an insurance policy:
You hope you never have to use it, but it's
good to know you have the protection should
you need it.
So, always use a stop loss and know its location
before you ever get into the trade.
Also, never widen your stop losses when the
market moves in negative territory.
Know that regardless of what happens, there
is another trade around the corner.
If your trading strategy relies on the success
of one single trade, it’s a very bad trading
strategy.
Remember that trading success is the accumulation
of many successfully, managed, both winning
trades and losing trades.
3.
Don’t involve in revenge trading
A big loss causes all sorts of inner conflict—a
need for revenge, fear, anger, frustration,
self-hate, market-hate, and the list goes
on.
After a big loss, there's no way to trade
with a clear head.
There are more than 250 trading days in a
year, so there is no rush to get back in there.
If you do so, you basically revenge trading.
Rather than looking to your strategy and make
sensible decisions around the incident, you
jump straight back in.
This is dangerous for your account for two
main reasons.
First, it forces you to throw your trading
discipline out the window.
It shifts your focus from your trading process
to trying to make enough money to recover
your losses.
Trading based on emotions and luck is not
trading.
It’s gambling.
It’s also a lose-lose situation.
If you lose a revenge trade, you increase
your losses even more with a trade that you
had barely planned for.
If you win, then you’re believe that trading
on guts and emotion works and you’re going
do it again.
So don’t do it.
4.
Accept responsibility
If you suffered a large loss; be sure to own
it.
Don’t brush it aside, hide from it, or blame
the “smart money” for your loss.
There is always an excuse for a losing trade,
but as traders and investors, we must accept
the risks.
Until we accept that we are responsible for
whatever happens with our orders, the same
thing will happen again.
Accept responsibility and figure out what
could have been done differently.
This will help reduce the chance of it occurring
again.
It is also healthier than blaming other factors
for your mistakes.
Blaming others is admitting you don't control
your own trading, and if that is the case,
you shouldn’t be trading at all.
If you control your trading and investing,
then you can fix it.
And is always something that can be done.
It may involve changing markets, changing
your strategy or your trading style.
If you find that scalping the 1-min chart
brings you a lot of losses, try swing trading.
The solution is there; you just need to find
it.
5.
Stop trading for a while
Sometimes, it’s better to take a break to
figure out what went wrong.
Do those things so that you can get back to
a better mindset in which you can refocus.
After that, assess what happened by reviewing
events carefully.
Think about where you fell short.
For example, did you take too much risk?
Was the trade well-planned?
Were you mentally sharp, or did you hold a
losing trade hoping to avoid a loss?
Taking a break from trading is one of the
hardest things to do, but it’s a smart move.
Wait for the conditions to improve.
Preserve your cash, save your sanity and focus
on other things.
When the conditions improve, so will your
results.
Remember: the market will not disappear tomorrow.
Nothing terrible will happen, on the contrary
– during this time away from charts you
will likely to come up with new, better ideas
on how to improve your trading.
6.
Trade lower position sizes
After a big loss, confidence can be low.
Not having a clear mind can cause you to skip
trades, panic out of trades, or be overly-aggressive.
None of these are good.
Take a step back and trade in a demo account
for a few days.
Because it's not real money, there is also
less pressure in a demo account, so it is
easier to focus on trading, and not worry
about the financial aspect of it.
A few winning days in the demo account will
raise your confidence levels and put you in
a better mental space to take on the markets
again with real money.
So after a losing streak, start small; don't
jump right back to the same position size
you were trading before.
In the first days back, trade small position
sizes.
A winning day with a small position size will
help build confidence, and you can slightly
increase your position size as the account
balance goes up.
If you have a losing day, losing on small
position sizes is easier to handle than another
losing day on full position sizes.
Even if you win a few days in a row, increase
your position size incrementally, so it takes
about a while to get back to your full position
size.
I know that after you have traded bigger position
sizes, it's annoying to start back with a
small position size, but it's for the best.
Bouncing back from a losing streak is about
getting back to basics and implementing a
strategy well, not actually about making money.
Money comes from implementing a strategy well.
Demo trading and trading small position sizes
gets you refocused on what's important, so
you can start building your confidence again.
7.
Let Go of the Outcome and Embrace the Process
Realize that trading is a continuous process
of learning.
Most of the times, in trading (like in real
life!), you learn more from your mistakes
than from your victories.
Losing money should motivate you to look closer
at your actions, read more, better educate
yourself, become more disciplined in your
execution and so on.
Next time, you will have a better idea of
what happened and where you went wrong and
can open up room for improvement and start
stacking the odds in your favor.
As cliché as is sounds, putting your focus
out of making money and into enjoying the
process will keep you on the right track and
more likely end up in profit.
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