No matter what game you play in life, losing is just part of trading. And as a trader, it is only natural to face loss from time to time. What is important is what you do and what response you give after the loss in trading. There is a great saying that reads, “One of our greatest freedoms is how we react to things.” Likewise, although you cannot control the market, you can control how you react to losses.
So in this article we want to focus on the less desirable side of trading. The losses. And more importantly, how you should deal with losses. But also we will talk about what not to do when your trades are not profitable. Because there are steps you can take to remedy the situation and then there are steps you can take that will definitely exacerbate the severity of losses. It is important that you know both.
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How Should You React to Losses in Trading?
One of the first things that we do when a loss occurs in trading is blaming ourselves or thinking that we have made a dire mistake or we are not good enough as a trader. While all of that may be true, you need to know that even the best and most experienced traders go through losses from time to time. This is because nobody is in charge of the market. So it doesn’t really matter how much you plan things out and how much analysis you implement to execute your trades precisely, when the market makes an unforeseen turn you have to go with it.
So in this way losses are kind of unavoidable. Although as a trader you can take various steps in order to soften the blow or simply reduce the occurrences. But they happen nonetheless. So it is better to learn how to react to them.
The very first step would be to slow your roll so that losses do not build up. Take a step back and give yourself some space so that you can analyze the situation. Then, before taking any of the steps that are discussed below, you must find out whether it is a single event or is it a series of losses making up a losing streak. This is because single losses, especially if they do not amount to much, can pretty much be ignored.
But if you are indeed stuck in a losing streak, then you must take immediate action.
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What You Should NOT Do After a Loss?
The steps that immediately follow a loss are very important. While we will show you the best steps to recover from losses, it is perhaps better to start with things you shouldn’t do.
First of all, when your positions are resulting in loss one after the other, do not keep trading with the exact same strategy hoping that it will get better or it will finally work. This can only increase your odds of loss.
At the same time do not get overly emotional and overreact to the situation. Try to keep a level head and do not lose your composure. Otherwise you will not be able to analyze the situation.
Also, never blame external factors. While certain external factors may have been influential in the losing result of your trade, it is ultimately up to you as the trade to make the decisions. So playing the blame game will not be productive.
Finally, do not let losses have such a deep psychological impact on you that you completely change your mind about trading and swear off financial markets for good. This is also another form of overreaction.
Best Steps to Take to Bounce Back from Losing in Trading
Now that we have discussed the don’ts and we have learned about initial damage control, let’s go through the best steps that you can take in order to successfully bounce back from losing.
Cut Your Losses to Move On and Learn
When a loss occurs, make sure you do not get stuck on it. This does not mean that you should not take it seriously. It means you should be able to move on, such that you can start analyzing and learning from the whole thing.
Review Lot Size
This is really important. Are you using the right lot size? Are you carrying out the proper position sizing process? These are some seriously important questions that you need to start asking yourself. Maybe the size of the position was too big and that is why your loss was big as well.
Review Stop Loss and Take Profit
Then you should review your stop loss and take profit strategies. Are you placing them correctly? Is your stop loss strong enough to prevent unnecessary losses? Is your take profit order calculated in the right way to lock in the profits and avoid the position from going into loss?
Document Things in Your Trading Journal
After you have carried out the necessary analysis of the situation, you need to jot everything down in a trading journal. This will allow you to be able to make proper conclusions from your analysis.
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Adjust Your Trading Strategy
Last but not least, you must implement what you have learned from this whole experience. And the way you can implement your new-found knowledge is by adjusting your trading strategy accordingly.
Conclusion
Even the most skilled and experienced traders have to deal with losses sometimes. What is important is how you deal with that situation. In this article we showed you how you can analyze your loss to make sure you are not stuck in a streak of losses. And then we discuss the dos and don’ts followed by a loss such that you can learn from the experience in a way that it is not repeated again.
