It is interesting to see how individual traders approach this business. Of course there are different methods and ways to trade but I am talking about the mindset in regards to trading losses. I think that is the number one criteria that can predict the ultimate success or failure of a trader.
Is mindset really important?
There all kinds of thoughts in regards to trading psychology and I’ve read some of the top traders say their mindset is 90% of their trading game.
These traders take each loss in stride and treat a loss as a part of doing business. They don’t rant on social media about the unfairness of the market. They don’t play the victim but understand that a loss is expected for their trading plan. By accepting the loss and treating it as a positive, it allows them to continually push the buttons without the fear that can paralyze others.
Wait! A loss is positive?
Why Is A Losing Trade Positive?
I should say “the right type of losing trade”. Let’s take it from the beginning.
Assuming you have a trading plan, there is something that has to happen in the market before you will risk your capital. Once the variables line up, you take your trade.
But all trades do not work out. By back testing your strategy, you already have some idea of the expectancy of your trading system and you understand that your wins/losses will come in a random distribution.
Inside of that trading plan are the rules you will lose to exit a trade that is not performing. Most of the time that is a stop loss you have placed in the market. Once your idea behind the trade is no longer valid for whatever reason, your stop is hit and you are out.
That is a positive loss. That loss fell in line with the rules of your trading plan and you implement these rules without failure.
Taking the loss at your predetermined cut off point is consistency in action and proof that you are following your trading plan. That is a positive loss to take.
When To Beat Yourself Up Over A Loss
If there is a positive there must be a negative and that is when you derail your trading plan for some reason. Maybe it is moving your stop loss further away from price after you initially set your stop loss. It can even be when you take a trade outside the parameters of your trading plan.
If you lose money because you didn’t follow your rules or because you treated your initial stop as a suggestion other than a rule, that is a negative loss.
On the flip side of that, we could say it is a positive loss because you were not rewarded for inconsistent trading. Once we are rewarded for doing the wrong things (this applies to a lot in life), we will tend to feel we could do the same thing again with the same result.
The problem is that in trading, it only takes one mistake to end your trading career. Losing at trading does not have to happen if you are hard on yourself when you make a trading decision that does not fit inside your tested trading strategy.
Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets. Michael Carr
Expect A Positive Outcome Regardless of P/L
You have two exits in your trades, your profit and your protective stop. We never know which trade is going to be a winner. Sure, we anticipate the entry and would like a winner but in the end, it all depends on the market and the bias of other traders. Don’t go in with the expectation of a win…..but an expectation of a positive outcome.
Since you plan to risk an amount that has you removed from the risk of ruin, a loss is not such an adverse event. Where it does become adverse…..to the extreme…is if you allow price to exceed the planned exit
Expect to lose.
Expect to lose a predetermined % of available risk capital. Adhering to the predetermined exit price in the case of loss leaves you with an account that is still ready to take another trade.
That loses are just a part of trading as a win makes can make you believe that a loss on your terms is a positive outcome. You adhered to your trading plan that allows you to “fight another day”. It gives you the confidence to take trade after trade knowing that you have the capacity to adhere to an exit price that is suitable to account sustainability.
The negative outcome is letting fear and hope take over and taking a loss much bigger than you had planned. That is the habit of those that are destined to account ruin.
Change your thinking to accept a loss on your terms as a positive outcome. I bet that you will have an easier time in booking those losses and moving on to the next trade not being gun shy.
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