Trading a loss can be devastating on both the financial as well as the emotional level.
As defeating as losses feel, your reaction to a loss will be much more important than the loss itself.
Inexperienced traders can be let their emotions run amok and hijack their trading strategies.
Some may try to trade through the pain, while others will withdraw from trading altogether.
Others may even try to trade in revenge in an attempt to recoup their losses.
No one of these reactions can be constructive on any level.
In fact, they are most likely to lean the other way and actually become destructive in you don’t learn how to handle losing trades.
Whether you took a loss due to an error in your strategy or due to a lack of discipline when trading, rest assured: whether they are big or small, in a streak or spread out over time, every single trader will suffer losses.
As that happens, new traders will often start questioning themselves.
As a direct consequence of that, mistakes are bound to happen. The most common mistakes are:
- Getting out of trades too quickly
- Holding positions for too long
- Avoiding trades entirely out of fear
- Getting into far many more trades than they should
Part of what really separates a good trader from a great trader is how they take those losses.
Great traders will see them as learning opportunities and use them as fuel to improve their skills and become better at what they do.
Based on those insights, here are some ground rules to help you avoid taking a big loss in the near future:
1. Stop losing big. Control your losses.
“You can't win unless you learn how to lose.” – Kareen Abdul-Jabbar
You’re probably thinking something in the lines of: “Well, thanks”, but hear us out on this one.
If you average out on a certain amount or percentage on a winning day, you can try to control the downside if you commit to getting out when you hit a loss of that same amount on any given day. By doing so, you will be minimizing risk as “crushing losses” will never happen because you will not be able to lose more than your daily average wins.
2. Stop losses are your friends
“The greatest test of courage on earth is to bear defeat without losing heart.” – Robert Green Ingersoll
Stop losses is to a trader what an insurance policy is to everyone: it is nice to have protection of your assets, but you sure hope you never actually have to use it.
Having a successful career as a trader isn’t simply correlated with accumulating many wins, rather it is the accumulation of many successfully managed wins and losses.
3. Never engage in revenge trading
“Success is a lousy teacher. It seduces smart people into thinking they can't lose.” – Bill Gates
Revenge, fear, anger, frustration, hate towards the market, hate towards oneself...
The list of emotions could go on almost indefinitely because it is nigh impossible to trade with a clear head after taking a loss, especially when it is a massive one.
As such, control your impulses as there is absolutely no rush in getting back in there.
Moreover, there is a inherent danger that comes with revenge trading: if you actually win, you will condition yourself into believing that you have guts and that trading which is fueled on emotion might actually be a winning strategy. As such, you will consider doing it again only to find that the dark side of revenge trading is digging a much deeper hole in your account.
4. Stop trading for a while
“Never be in a hurry; do everything quietly and in a calm spirit. Do not lose your inner peace for anything whatsoever, even if your whole world seems upset.” –St. Francis de Sales
Taking a break from trading is often one of the hardest things a trader has to do.
Leaving the game is hard, even if it is just for a little while, but clearing your head and waiting for the conditions to improve is beneficial because as those conditions improve, so will your results.
So, learn to preserve your cash, but more importantly, learn to preserve your sanity.
5. Trade lower position sizes
“Man cannot discover new oceans unless he has the courage to lose sight of the shore.” – André Gide
As a counter to the last point, if you are not able to stop entirely, try taking a step back and lower your position sizes to lessen the pressure. You can even try a demo account for a little while.
Winning with a smaller position will help you get your confidence back
Accepting responsibility, embrace the process and forget about the outcome.
Keep on educating yourself and develop a flawless execution.
As Lyndon B. Johnson, the 36th President of the United States of America once said: “Yesterday is not ours to recover, but tomorrow is ours to win or lose.”
So, if you’ve just recently taken an L, here’s to a better tomorrow!