How To Be Okay With Trading Loss?

In this article, I present a healthy constructive way of dealing with trading losses.

By practicing this technique intentionally and repeatedly, traders will end up changing their perspective on loss and ultimately, their reaction to it.

Traders have a huge difficulty in separating the reality of a losing trade from the psychological sense of feeling like a loser.

Many traders equate losing with being a loser.

Once a trader is self-focused and not market-focused, distortions in decision-making are inevitable.

There's a lot of information on how to make money on the market.

What we don't see that often is information on how to lose in the market.

Ironically, traders are measured through the way they lose more than through the way they win.

This is because when you know how to minimize your wins, you learned to beat your ego in the market. Therefore, maximizing your winners becomes easier.

“Cut your losers small and let your winners run”

I'm sure you've already heard of this one.

You probably nod your head in agreement every time you read it but after all, what does this really mean?

In this article, you'll learn an effective way to cut your losers small and deal the best way with trading losses.

Here are the 4 steps:

1. Clear defined plan;

2. Accepting your risk;

3. Anticipate your losses;

4. Change perspective.t

1. Clear defined plan

The first principle to dealing with loss is to have a clear and defined trading plan.

Your trading system includes entry method, trade management, and exit plans, risk management model, and rules.

Most of the traders seem to disregard what happens after the entry.

They focus on the entry but then don’t have a clear sense of exit - especially if that exit is going to put them into the red.

A good entry is only as good as the way you ride the trade. In fact, the way you ride the trade plays a bigger role in its result than the entry itself.

The elements of your system that allow you to manage losses better are the trade management and exit plans.

Your trade management includes rules to push stop-loss to breakeven (risk-free scenario), to scaling in your position, and trade invalidation rules - those that allow you to collapse your trade manually when it's not working out.

Your exit method is the way you get out of the market. You can scale out in parts or fully close the position at one specific level.

Your trade management and exit methods should allow you to manage your emotions in a way that they don't negatively affect your performance.

Think with me, a rule to push your stop-loss to breakeven will remove a lot of the pressure off the game and will probably allow you to run your winners easily; A rule to close the trade when it's not working out will eventually save you from a lot of losses.

Once you have a plan that doesn't let you hesitate or overthink, then you're well prepared to trade!

2. Accepting your risk

Being friends with loss requires you to fully accept the risk involved in a trade.

If you enter a trade without accepting the risk used, then you broke the first rule of flawless execution and you most likely will hold a poor performance.

Trading with a risk you don't accept financially and emotionally will give rise to all kinds of trading mistakes.

You need to be able to tell yourself: If I lose this amount of money, I'll be okay, that's not a big deal to me; I'll be able to continue trading and quickly stabilize my emotions in a way that will not interfere with my further decision-making.

3. Anticipate loss

After having a clearly defined plan and having accepted the risk in your trades, you need to optimize your expectations in the market.

The prepared trader doesn't get surprised by any outcome or market move. He has answers to all the possible market scenarios.

The key is in quickly decide which answer to give based on the information the market presents you with.

If you can anticipate your losses you'll never be caught off guard.

This is, again, the role of your trade management plan: It should rule your behavior in trades that are working out as well as in trades that are not working out!

When you know the trade is working out you might want to push your stop-loss to breakeven to protect yourself or scale in to maximize the gains.

But you should also know what a trade looks like when it's not working out. Your trade invalidation rules allow you to manually close a position as soon as you notice this.

To establish trade invalidation rules, you need to make an in-depth review of your wins and losses and find similarities between your losses that you don't see in your wins.

Based on these similarities you then can create a rule to get you out of a position before it hits your stop-loss.

Let's say that you notice that in most of your losses, price tends to lose momentum. This doesn't happen in your wins. Based on this realization, you have a clear indication of when your trades are not working out and you can transform it into an objective rule.

This rule needs to save you more times than not. However, there are times price will go in your direction after you have manually closed the trade. Don't rely on the result of one trade to judge the effectiveness of your rule. If you tested this rule in a big sample size of trades, then you must trust it. Think probabilistically!

4. Changing Perspective

You need to have a defined plan, accept your risk and anticipate your losses by lowering your expectations and knowing how to cut them small... but there's still a strong sense of negativism associated with loss in our society.

For this reason, it's difficult for us, humans, to be okay with loss. In trading, we need to learn to be in peace with it or we'll get drowned.

You'll always lose in the market.

Losses are inevitable you just have to learn how to make them small.

Therefore, losing is not a determining factor for the quality of your trading but how you act after the loss.

The unsuccessful trader will respond to one loss with frustration: “Why do I always get caught buying the highs? I can’t believe “they” ran the market against me! This market is impossible to trade.”

Because of that frustration, and the associated self-focus, the unsuccessful trader does not take any information from that trade.

The successful trader sees loss as a piece of extra information he obtained that'll help him take smarter decisions in further trades.

He sees loss as privileged information he receives from the market.

Here are two completely different perspectives and therefore, they create different responses and results.

To change your perspective of loss it's not enough to think you want to change. You need to act differently after you experience a loss.

If you want different results you need to do things differently and do different things.

The same trigger - loss - can have different interpretations by different people. It's these interpretations called 'perception' that make us behave the way we do.

Trigger -> Emotional State (perception) -> Behavior

If you work in reverse you'll be able to change this perception.

Start working on your behavior after you experience a loss.

If you used to overtrade our of angriness after a loss, now, choose a different behavior. One that brings you back to calm and focus.

Once you execute this new behavior, your brain will create a different neural connection and if you reinforce it you'll create a new belief that'll give rise to a change in perspective about loss.

Instead of getting mad and going away off the charts, face loss in a different way. Take advantage of the difficult situation to build emotional strength; Calm down your thoughts by using a breathing technique: Inhale deeply through your nose and exhale through your mouth. As you do this try to lengthen your exhales and inhales and feel your body relax.

As you calm yourself it's easier to access your mind - be aware. A door gets opened for you to see what's happening inside your mind. But you'll only open this door if you're able to control your body response first.

Then, understand what you're feeling and write it down - self-awareness.

Ultimately, analyze the loss and understand if it was a healthy one - where you did follow your plan - or a toxic one - where you broke your plan.

If it was a healthy loss, name the strengths and things you did well. Contrast the bad mental state this loss left you in with these strengths. You'll quickly realize that there's no reason to feel bad about it.

Our brain doesn't like incongruency between thoughts and emotions. When you feel bad about something but your rational brain recognizes that it was inevitable and you did the best you could, your brain will be quick to readjust your emotions. In this case, your good performance on that loss should drive you to a good emotional state and that's what gonna happen afterward. However, this is something you need to practice.

On the other hand, if it was an unhealthy loss, identify what you did wrong and what you'll do differently next time. Pinpoint precise improvements that you'll remember easily.

After executing this ritual, you'll feel in control. Not in control of the outcome of your next trade but in control of yourself - the most precious kind of control!

Instead of running away, frustrated and angry, you faced your emotions. You didn't run away from the trigger, you just executed a ritual that brought you a calm mental state. And this new mental state led you to a different response.

Isn't this a much better approach than keeping trading, unaware, and dragging your bad mental state to your next trades?

Those trades will have their faith drawn.

If you aren't able to change your emotional state, you'll not be able to change your behavioral responses.

The human brain works all based on emotions: pleasant ones and painful ones.

We often tend to run away from the painful ones but if we're able to face them with a constructive approach, we'll be able to transform our mental state. This is the highest form of power of humankind.

Last Words...

I challenge you to try these steps for yourself:

1. Make sure you have a precise trading system that guides your behavior toward the various market situations;

2. Make sure you fully accept your risk in each trade. Translate the risk percentage in money and ask yourself if you're willing to lose that money;

3. Study your trades and search for indicators to when your trades are not working out. Transform those indicators into trade invalidation rules;

4. Put in place a loss ritual that brings you calm and clarity after a loss. By acting differently toward one same trigger, you'll eventually change your perspective on loss.

If you run away from loss you'll never build the necessary capabilities and emotional strength to overcome it. If you face loss, however, you'll be much more prepared to easily handle the next one.

Nothing represents a surprise to the well-prepared trader.

Have a great trading week,

And one last thing...

If you enjoyed this post, comment below with your thoughts :)

Sara