It’s inevitable. You follow your trading rules, you do your analysis, you execute properly, and a few hours or a few days later you watch your once darling trade turn rogue and go completely against you. It happens to every trader, and it’s all part of the learning process when it comes to trading. Being able to deal with a loss effectively is one of the first steps in becoming a trader that can generate long-term profits, but it’s not easy. A loss can cause a whole slew of emotions in a trader – everything from anger to self-loathing to never wanting to trade again. Controlling these emotions (and all others) is one of the keys to trading like a pro.
The most important thing you can do is to avoid experiencing large losses in the first place. This means sticking to your trading plan. A good trading plan will have rules that limit how much money is placed at risk, and for how much time. Each trader has his or her own threshold for pain when it comes to losses, but a good rule of thumb is to never let losses exceed 2-3% of your total account value. If you’re able to continuously trade according to your plan, you’ll take a big step in avoiding huge drawdowns to start with.
When you do experience a loss, it’s important to analyze what caused it. If you kept it small, looking at the trade right after you take the loss could be a good way to understand what went wrong. If, however, you went completely against everything that we suggest and took a big hit, it may be worth it to let a day or two pass to give yourself a chance to cool down. Stop trading and give yourself a chance to cool down, then take an objective look at what went wrong.
Once you’ve figured out what happened, write down the details of the trade, preferably in your trade log or journal. Don’t merely record the details of the trade, but also write down what things like what went through your head when you executed the thread, how you were feeling, if you had a bad day, and what you were expecting the outcome to be. After you accumulate a few of these reports (hopefully not too many), you should periodically go through them to see if there are any trends with your losing trades. If there are, then you need to work on addressing some issues.
Finally, after you’ve had a chance to cool down (and make sure you take the time to take a break), get back into the market as you normally would. Don’t let one or two losing trades completely change the way you operate, especially if you’ve been profitable in the past. It’s also important not to start trading with the goal of recouping your losses. This type of mindset could cause you to take unnecessary risks and puts you in a position of experiencing even more losses. Instead, accept the loss for what it was, learn from it, and put it behind you. If you’re a good trader, you’ll recoup your losses, and more, in time.
Ultimately, you need to deal with a loss with poise, grace, and most importantly, objective discipline. Try to take your emotions out of the picture when you make your trades, and look at all of your losses with a very critical eye. Think about what you could have done differently, record it, review it, and avoid making the same mistakes in the future. That is one of the pillars of long-term profitable trading.
