Having losing trades is inevitable, how you deal with them is always a choice.
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We have a quick question from a subscriber saying that recently they have had to deal with some losing trades, a couple of them in a row, and they wanted to know whether we have any tips on dealing with losing trades.
This is actually the perfect day to ask me about this because I just took a loss on a trade today that went south against me very quickly.
So, there is really no easy way to deal with losses in my opinion, it comes down to your psychology at the end of the day, but let me share a couple of things with you.
A loss will also be hard to stomach if you have lost more than you feel comfortable with. For example, if you are comfortable risking 1% or 2% or whatever the amount is on a trade, and you end up risking more than what you feel comfortable with, you will have a hard time dealing with that.
So, the first thing you want to always do is make sure that wherever you have placed your stop loss, that the amount your risking is an amount you are comfortable to lose, so basically you need to accept that loss, and you need to be able to be okay with saying goodbye to that money because no matter what your conviction level is and no matter how high the probability of your trade is, statistically speaking every coin toss has a 50/50 chance right, that means every today still has only a 50/50 chance of succeeding.
So, never go into a trade knowing that it will win, you can’t know that, that’s why trading is so difficult, because it’s full of uncertainty and yes probability will help you, getting an edge will help you, but at the end of the day the moment you enter the market you open yourself up to uncertainty that you can’t control, that’s risk taking.
So, firstly, always make sure you accepted that loss, entirely. Now, one way that I have always learnt to deal with that is by reading a book called Trading in the zone by Mark Douglas, and in this book he teaches that every trade is basically just a necessary expense like you have in a normal business.
For example, if you run a restaurant, you need to pay for your fresh produce you need to pay for your staff for your rent etc, all of those are necessary expenses that you need to take in order to make a profit, and in the same way our losing trades can be viewed as necessary expenses.
So, in that sense, the loss will never be a joyous celebration, right, a business owner is never happy when he needs to pay his wage bill, but we need to spend it to make a profit.
Then, the third thing I can leave you with, is that a losing trade should never define you. Don’t over-leverage unless you know what you are doing, and by that I mean don’t go risking your entire account on a trade just because you think it’s a done deal, don’t do that. Don’t try to make it big with one trade. You want to have success over a long career, and type of hedge fund or investment firm or money manager will need to weather losses, but you can’t let those losses define you.
You see, some of the gurus out there in the finance game will have people believe that trading is just always winning all the time, and they place this burden on traders to think that you will never ever have losing trades, but the wake up call to this is that some of the best hedge funds and investment firms around the world will often have losing trades, and even losing streaks stretching over a few months, so that is normal.
Of course, if you are consistently losing money that is a different story, but having a few losing trades in a row is statistically inevitable, so make sure that you are mentally prepared for that to happen, and importantly, make sure that when it happens you don’t lose your head.
If you find yourself angry or upset about a loss or a few losses, then maybe take a break, take a day or two off from trading, clear your head and then get back into the game when you are ready for it, when you are up for it, because trading in the wrong state of mind puts you at a massive disadvantage from the get go and usually has negative implications for your PNL.
So, hope that helps with the question.
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