“Don’t cry over spilled milk.”
You’ve probably heard this idiom a lot of times. By definition, this means not spending your time worrying about things of the past that cannot be changed. But in the world of trading, a spilled milk that costs thousands of dollars is far too heavy to bear.
Even before tossing money on any types of investments, investors should be aware that losses can occur at any point of their venture. We’re not encouraging investors to be negative. It’s not also about painting a bad picture of the world of investing. We’re just saying that losses are part of every trader’s journey. Even a trading marvel like Warren Buffett had experienced his fair share of losses.
However, there is something that sets a trader apart from others. It’s not a sophisticated trading knowledge, but an equally exceptional factor: that’s how they respond to a trading loss.
Have a look as we lay down the most important things you need to know when dealing with losses.
“What’s on your mind?”
Facebook keeps on asking us this every day. Who knew it would be very beneficial to our trading, especially when experiencing losses?
The thing that leads an investor to even more heartbreaking trading losses is located right inside his head. When experiencing a trading loss, there’s this natural, strong urge in him to recoup what he has lost.
There are too many negative things that go inside his head — such as frustration, anger, revenge, fear, self-hate, and even market hate. These push him to make hasty and uncalculated trading decisions. And it leads to more and more significant losses.
Many traders invite more losses because they’re not aware that something is pushing them to attract these things. It’s the stuff in their head. We know how hard it is to tame the urge of recouping what has been lost. But calming and stopping yourself for a moment is the first crucial step in cutting the cycle of losses.
Ask yourself this critical question: “What’s on my mind right now?”. It’s beneficial to be conscious of what’s running in your head amid pressure.
Set a Threshold
Determine your average profitable day. It doesn’t matter if it’s $500, $2,000, or even $10,000. What matters most is not to make any loss that is more than your average profitable day. If you cannot do what we’ve told you in number one, then your losses will dwarf your average profitable day in no time.
The moment you point your finger at anything after suffering a loss, you’ve just made a foggy road ahead of you. Blaming sucks up the time you should be spending in reflecting on your decline and figuring out what could have gone wrong.
There are plenty of factors to blame when suffering a loss; maybe it’s reasonable to blame those things. But get this, blaming adds up to your losses.
There are things that you can do to avoid losses such as having a backup data/connection feed or changing markets. On top of that, you can set up a platform to liquidate your trades if they hit a daily stop-loss limit.
There’s no perfect formula to avoid losses completely because there are circumstances that are beyond your control. But you should realize that there are lots of mitigating measures you can do to minimize the impact.
Solutions are out there, but why do many traders seem to be forgetting the crucial measures? It’s because they are too preoccupied with other things, specifically on recouping what they’ve lost. This leads to the importance of clearing up your head and getting rid of the blame game.
Going Back to the Drawing Board
A trading loss is a wake-up call to tweak or even initiate an overhaul on your trading plan. Disassemble your plan and look at all the pieces. How do they fit with each other? Are there other things that you need to integrate into it? In what market condition does it work best? How can you adjust its expected profit and risk? How can this current trading plan be streamlined even better?
Whether you agree or not, disassembling your trading plan is one of the most exciting parts of being a trader. It builds focus and interest. It pushes your brain to work even harder. Having a clear head and a healthy dose of an urge to recoup what you’ve lost can result in a better, more solid trading plan.
Do Not Rush
A trading loss can distort your emotions and thinking. This is the state in which you are prone to creating a series of bigger and more disastrous trading decisions.
You’ve got to step back. It will be a tug-of-war fight within you, but you’ve got to step back. Pushing through with a distorted emotion and thinking will result in an equally distorted decision and outcome. It can push you to skip trades, to be highly aggressive, or panic out of trades. The only person that can save you from losing more money is no one but yourself.
Clear your head first. When you want to get back to the game, there is a way to trade without losing more money. We recommend that you spend time on a demo account before returning to the trading arena. A demo account allows you to see a reflection of your current state and your readiness to trade again — all without losing money.
You’ve got to have a decent trading outcome on your demo account before returning to trading live. This reflects your readiness to return and trade real money again.
It’s Time for Live Trading (Again)
There’s a reason why we put this in the last part. You cannot return to trading live without doing first the things that we’ve discussed earlier. We know how much you would want to get back to trading, but a healthy dose of caution must suppress your over-excitement.
Starting small is the best way to begin again. Start with trading small position size. There are two benefits of starting this way. If you win, small size can surely boost your confidence again. But if you lose, small size is manageable to bear. That’s the safest way to return. Gradually increase your position size. Take your time. Always remember that rushing traders are rushing to lose.
Also read: Be The Next Success Story In Forex Trading