Mentally Manage Your Losing Trades

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 system and it takes a series of losses, 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 and start to believe the market must just be ‘wrong’.


Hate Trading Losses

Trading isn’t always about doing X and getting result Y.

Then of course the next stage is abandoning the trading system as ‘clearly’ it’s useless. It must be understood that even when you execute a good trading plan well, there will be times when you must take a loss.

Wait, 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 trading losses”.

I hate all losses.

I obviously prefer to take small losses over big ones, 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 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. Small losses add up.

What small really means is getting out of a bad trade as soon as you can.

That means you might have a set of criteria which will get you out of a trade before it hits your stop-loss order.

It also means not holding on to a trade in the red when it’s well beyond your stop, in the hope it will come back for you.

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 hating to lose as a motivator to having you 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).

The effects of sore losing are negative, but are more wide-ranging than many would expect.


Sore Losers Don’t Get Great Results Over Time

Here are 5 downfalls of being a sore loser:

Demotivating/demoralizing – If a good plan fails and you start to believe there’s something wrong with it, you’re less likely to stick to it.

But also taking into account all the effort you’ve put into creating, 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 destructive and push you into taking rash, revenge-type trades.

Believing at the time that the market must be wrong and being annoyed that it has the never to take money off you, you go on a crusade to take it down.

The market doesn’t care about you or your feelings.


Deceiving – With your head spinning with 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 in the money and end up losing because you wanted more on the trade.

Perhaps worse, refusing to let go when a trade goes wrong results in being forced into taking a big loss (right before the market reverses of course).

Following on from this is, by not accepting cumulative intra-day losses within your daily stop limit and fighting to get back to even on the day,  the temptation is to try to make back the entire amount in one trade 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.  It’s a vicious circle!


Recognize And Fix

The first step to rectifying the problem is recognition. This is why Netpicks has always pushed traders to keep a journal.

Even if you think you know you have certain issues and what they are, journaling for a sustained period of time can be an eye-opener as to why they occur and to what extent.

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 testing and your results say that historically, the system you’re using will win 99% of the time.

  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.

You must know the details of your trading strategy and when it is no longer producing results.

Strategies will have periods of working really well and then stop working.

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, that desire for revenge 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.


Keep Your Finger Off The Button

Do not react!

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 you’re still within your daily loss limit.

Feeling bad about a trading loss doesn’t mean you have to be controlled by knee-jerk responses.

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.

We all have been there.

Sore losing has driven would be traders from this business long before they had a chance to see their own potential.  Don’t be one of them.