The 10 Causes of Bad Loss Handling (and the solutions)

How have you been dealing with your losses lately?

The way you deal with a loss dictates your next win.

Here, are the 10 main barriers for your learning process and for your trading profits:

#1. Wrong Belief System

This might be the most underrated reason for bad loss handling, in trading.

Your belief system represents what you are. If you have opposite beliefs to the ones needed to thrive in this industry, you gonna be trapped every single time.

Your efforts in trading are worthless until you don't fix the root of the problem. The root of the problem are your beliefs about money, failure, loss, etc.

- If you always believed that money only comes from hard work and in investing your time, you are more probable to give your trading profits back to the market because you believe you don't deserve them.

- If you believe that money is scarce, you probably will take profits to early and don't let your trades ride.

These, are examples of beliefs that can neglect your trading performance.

Trading goes against the beliefs we normally grow up with, so as traders, we all need to rewire our brains somehow and implement new beliefs and habits.

Solution: Notice all your actions and behaviors in your daily basis. Write them down. Become highly aware of your thoughts, judgments and emotions. Journal everything you can. You will be able to analyse some of your thought patterns and actions and fix them more easily. Awareness is the first step for change.

#2. Money Attachment

We all start trading with one thing in mind: money!

The irony of this, is that traders are only able to make money when they stop chasing it.

Trading is a game of patience and a lot of emotion control; if you're being money driven instead of process driven, you will trade emotionally.

The process is built on patience, discipline, consistency and it's definitely the slowest process you can be in. You don't want to put pressure on yourself to get money from trading. This will not only put your emotions in the game but will prevent you from learning the necessary skill-set.

Solution: You need to replace your attachment to money with attachment to the process. This means, become completely obsessed with the process. It should be seen as the end goal and money, a by-product of your performance. When you do this, you are able to become more patient and take a lot of pressure out of your shoulders. You'll wake up more motivated because you know that your goal is much more attainable and under control. It's difficult to not focus on money but if you can remain committed, you'll be surprised of how fast you can get there.

#3. Trying to avoid loss

In trading, losses are inevitable. The faster you recognize this, the faster you're able to accept them and deal with it the best way possible.

There is no trading system with 100% win rate. So all you have to do is cut your losses small when they present themselves. You never know when they gonna show up so that's why you have to be prepared. Trying to avoid loss is ignoring the nature of trading: a probabilistic game.

Solution: Recognize that even the best of the traders lose. The secret is not in avoiding loss, but making them small. We will talk about how further in this post.

#4. Concepts of Failure and Success

Take a minute and honestly answer to this question:

When do you feel you've failed in trading?

When you lose? When you're wrong? When you traded emotionally?

Normally, beginners associate failure with loss. That is how they evaluate their performance and that's the reason of why they totally miss the point of trading.

In trading, as we talked, you need to rewire your brain and make a mindset switch. This, includes redefining the concepts you have of failure and success.

But How?

First of all, you need to accept the previous point described: losses are inevitable. You'll never be able to be 100% right.

So if we can't avoid loss, does it make sense to associate it with failure? No!

But not knowing how to deal with it; not having a plan to reduce loss; act emotionally every time you lose, that, is an indicator of failure.

As long as you keep your losses small and under control, it's alright.

Solution:

This is the only way you should be evaluating your trading:

Success - I followed my trading plan; I lost but I was able to cut the loss small as my risk model tells me to.

Failure - I disrespected my trading plan. I putted emotions in the game and widen my exposure; I turned a small loss into a huge loss because of my ego.

#5. High Exposure

If you're using a high risk that you aren't comfortable with, your emotions gonna come up to say "hi".

You'll be so worried with that trade that controlling your emotions gonna become the hardest thing to do.

Solution: Use a comfortable risk. To decide what's your ideal risk, you need to think like this:

"If this trade turns out a loss, the amount of money I'll lose doesn't bother me. I'm comfortable with that and I know I can make it up."

I always advice traders to use a 2% risk. Start from there, and see what fits you best. It's all on you.

#6. No Plan to Reduce Loss

If losses are inevitable and the market, unpredictable, it means we never know when they gonna occur. For this reason, you need to be prepared for any outcome.

Traders set a plan to win but often forget that the key is in controlling the losses (capital preservation). So having a plan to lose is crucial too!

Without a plan, you'll let your emotions decide for you. And most of the times, it's not the greatest of the decisions. The result? A big loss.

Solution: As you have your confluences to enter the market, set as well rules to keep you in a trade. These, are called invalidation rules and they allow you to cut your losses small before you even get stopped out.

An example of it can be "If price starts to consolidate for 1h after I entered a trade, I'm out."

As you gain experience, you'll build a sense of what your invalidation rules should be.

#7. Trying to control the outcome

Many traders and specially beginners, see trading as a predicting game. This idea, induces them unconsciously, in trying to control the outcome of each trade.

This mistake leads to high expectations and hope. Traders who try to control outcomes normally expect one single scenario to happen. If it doesn't happen, they assume they are wrong. This leads to unnecessary frustration. The faster you accept you CAN'T control nothing but yourself, the faster you'll grow in this business.

Solution: Simply accept the unpredictability of the market. When you accept this, you'll be in peace with any outcome. Focus on what you can control instead and you'll realize you have more power than you thought.

#8. Ego

We all have a ego. Some are bigger than others but we all own one as part of our nature. The feeling of being right is what feeds our egos.

In trading, the higher your ego, the more difficult is to arrive to profitability.

In dealing with losses, putting your ego in the game gonna result in one thing:

- You'll not cut your loss small because you are so attached to the need of being right that you only perceive one possibility: price reversing in your direction.

Solution: Lower your ego. How? Set different reactions to the different price scenarios that can occur. Make sure to consider all the possible scenarios because the market, as we know, is completely unpredictable. Don't marry a trading idea or fall in love with a trade. React exclusively and objectively to what the market is giving you at that moment.

#9. No confidence in your strategy

If you have no trust in your strategy, you'll probably struggle to execute it flawlessly.

Less confidence -> Less discipline -> More emotions -> Higher chance to disrespect your system.

Solution:

- Backtest;

- Test.

Nobody likes to hear this. No trader wants to put in the work. We are here to trade and be active on the markets and that's how we feel we are doing something to grow.

This is wrong! Most of the work has to be done beforehand.

The more you backtest your strategy, the more confidence you'll have to execute it & the more disciplined you'll get. Is that simple. Plus, you'll gain extra understanding of how price can behave when your set up shows up. You'll build preparation.

If you do this, I promise you you'll be ahead of 90% of the traders out there. You'll save yourself a lot of time. Remember: Get to the root of the problem, fix the things that matter and move forward!

#10. No confidence in yourself

Not only you need to have confidence in your strategy but you need to be confident enough to execute it the best way possible.

If you lack confidence, you can have all the trading skills needed but you'll fail to execute them right. You need to be confident to know what to do at the right moment without a single doubt.

Solution: Visualize your goals. Develop healthy habits. Go to the gym, sleep enough hours, eat well. All this things are indirectly correlated with your performance in trading. Trading is a skill that requires a lot of emotional control so you need to be in the best shape to handle the inherent difficulties.

We, traders, can easily fall into bad habits and routines. Clean your mind and have different hobbies and tasks in your daily life. Believe it or not, is more productive than staring at charts all day, eating junk food and being anxious waiting for your set ups.

This will boost your health and, as a consequence, the confidence in yourself!

Conclusion

In sum, the only way you can productively handle your losses, is by facing them, accepting them and build a solid plan to reduce them.

You should:

• Optimize your beliefs;

• Take the process as the end goal;

• Accept the inevitability of losses;

• Redefine concepts of failure and success;

• Use a risk that you feel comfortable;

• Build a plan to cut losses small;

• Recognize the uncertainty of the market;

• Lower your ego - consider all the possible scenarios;

• Backtest & test your strategy;

• Develop good habits outside of the charts.

Identifying the problem is the first step for change.

Be aware, remain humble & trade wisely.

The Perceptive Trader