Deal With Losing Trades Or Lose Your Trading Career

Posted in: Trading Article, trading psychology

losing trades

We’ve all been there to some extent during a tough trading session as a day trader where losing trades has caused us some grief.

Maybe we skipped our preparation for the day or perhaps we were distracted whilst day trading or maybe even the market just flipped, handing out losing trades on a regular basis on what’s normally a great play.

It’s not too difficult to see that when we feel cheated or frustrated, there’s a danger of slipping into the whiner/sore loser mentality.

The way I see it, is that trading acts like drawing venom out of a bite.

It brings out ugly emotions that we need to learn to control and naturally avoid if we’re to prosper in the long term.

 

Loss Aversion Is Not A Trading Strategy

A part to sore losing in trading is loss aversion. This is part of human nature and trading really brings it out in all its glory.

When we have a good trading strategy and it takes a series of losing trades, it’s easy for this to come out. Not only does loss aversion tend to make us not want to lose what we have, it also makes us not want to accept losses we’ve already taken.

This in particular becomes worse if we don’t understand the concept of trading probability, that a trading strategy will lose,  and start to believe the market must just be ‘wrong’.

Trading isn’t always about doing x and getting result y. Then of course the next stage is abandoning the trading plan as ‘clearly’ it’s useless. It absolutely must be understood that even when you execute a good plan well, there will be times when you must take a losing trade.

Now I’d like to point out at that being a sore loser and hating losing are not necessarily the same thing.

Sore losers usually hate losing too, but hating losing is something to cultivate if you can become a good loser. I hear all the time that people say “learn to love small losses”.

 

Learn To Love Losing Trades When They Are Small Losses

Well frankly, I hate all losing trades.  Period.

I prefer to take small losses over big losing trades, but I certainly will never like, let alone “love” a loss whether it be small or large. There’s a good amount of things in trading which can seem counter-intuitive, but this one I think is wrong.

The reason I say this is because it goes against our nature and what we’re trying to achieve. It’s better to hate big losses and therefore take small ones instead.

Don’t love small losses.

Also, it’s important to define “small” as it leads the mind to thinking taking losses of only a few ticks will help you be successful. This can be the complete reverse of reality.

stop loss losing trades
Use A Stop Loss To Keep Losing Trades Small

Small really means getting out of a bad trade as soon as you can. That means you might have a set of criteria or are seeing some type of price action which will get you out of a trade before it hits your stop-loss order.

It also means not mindlessly clinging on to a trade in the red when it’s well beyond your stop, in the hope it will come back for you. Letting a trade run past your predetermined stop loss is horrendous money management and will cause you to take a loss much larger than you planned for.

Hating losing can also be a big motivator too.

A great deal has been said about leveraging our natural emotions to achieve desired responses. If you can use it to motivate you to prepare properly, to make sure you’re mentally ready to trade, focused and free from distraction, then that is a positive response to the strong emotion. It’s the will to win (not the refusal to accept losing).

 

Sore Losing Can Can Put A Dagger Into Your Trading

The effects of sore losing are clearly quite negative, but perhaps more wide-ranging than many would expect. They can be:

Demotivating/demoralizing as a trader– If a good trading plan fails and you start to believe there’s something wrong with it, you’re far less likely to stick to it. But also taking into account all the effort you’ve put into creating, back testing and preparing to trade your plan, it can act to make you feel incapable and less willing to put the same effort in again.

Antagonizing – This can be pretty destructive and push you into taking rash, revenge-type trades and a position size you would not normally take. Believing at the time that the market must be wrong and being annoyed that it has the audacity to take money off you, you go on a personal crusade to take it down. The market doesn’t care. Really.

Deceiving – With your head spinning with the emotions of anger, disappointment, inadequacy and whatever else, the true form of the market is likely to become pretty blurred. You might think at the time it’s crystal clear, but that’s probably not the case.

Emotionally destabilizing – Because of all the emotions which you feel, the ups and downs of each and every trade can start to be felt 100 fold. Each tick against you is like a statement of how terrible you are at trading or how stupid the market must be and ultimately drives you towards losing control and discipline.

Preventing acceptance of losses – If you place too much importance on any one trade, you could find yourself in a position where you’ve been well onside and end up losing because you wanted more on the trade, or a refusal to let go when a trade goes wrong results in being forced into taking a big loss (often right before the market reverses).

Following on from this is, by not accepting cumulative intra-day losses within your daily stop limit and fighting to get back to even, the temptation is to try to make back the entire amount in one fell swoop which is not planned for and unrealistic.

Decent trades can then turn into bad ones and compound the losses for the day and cause further psychological issues.

 

The first step to rectifying the problem clearly is recognition

This is why people always bang on about keeping a journal. Even if you think you know you have certain issues and what they are, journal for a sustained period of time can be an eye-opener as to why they occur and to what extent.

trade journal
Use A Trade Journal To Deal With Losing Trades

Next, you must start out the day by accepting that you don’t know whether the next trade you take will be a winner or a loser. This is whether or not you’ve done a bunch of strategy testing and your results say that historically and in your demo account the system you’re using has a 99% win rate

  1. All of the 1% which are losing trades could come in a cluster.
  2. The market could just change and the strategy lose some efficacy.

Trading strategies tend to have periods of working really well and less well. Then you must see when you take a loss, the annoyance generated by it should elicit a planned response rather than an uncontrolled one.

When you feel that wrenching in your gut because you’ve just taken a hit on a trade, you must train yourself to wait and reassess the situation to see if you really think the market is telling you want you had originally thought.

Don’t immediately jump back into the market.

Perhaps the 3-strike rule is one which may be of benefit. This is if you take 3 consecutive losers you stop trading, step back and reassess. Possibly go for a walk, go to the gym and just take your mind off trading. Then reappraise the market and recenter/refocus yourself before getting involved again if of course you’re still within your daily loss limit.

Feeling bad about losing trades doesn’t mean you have to be controlled by untrained responses to the emotion. Instead, if you can use this to drive you to prepare well, to be ready to trade each day and make sure you are focused and free from distraction, you’ll be harnessing the power of emotion rather than being a sore loser every time you take a losing trade.

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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