Trading Losses: How to handle them like a pro…

Trading losses are guaranteed, yet for some reason, new or struggling traders seem surprised when they happen.

A few years ago I was hosting a seminar in NYC and I asked this question to the room:

Is placing a trade, accepting risk?

I asked for a show of hands to see who believed this was true. Virtually every hand went up.

OK, that was the answer I expected (which is the wrong answer)..

On to question #2:

Have you ever moved or cancelled a stop-loss just as it was about to get hit?

Again, most traders in the room admitted to this attempt at avoiding a trading loss. So many traders agree it looked like the room was doing the wave.

And this is why most traders have a problem with trading losses. They never expect to have them.

Here is the reason why, this hidden flaw, prevents a trader from succeeding.

Placing a trade is not accepting risk. Placing a trade is taking risk.

If a trader truly accepted risk, which means accepting the possibility of a trading loss, before the trade, the trader would never move the stop-loss or cancel it. This is because prior to the trade, she accepted the dollar amount at risk, in exchange for the potential profit.

In other words, you accept the risk/trading loss as a business expense. And if it happens you simply move on to the next trade.

Trading Losses: Connie Consistent Versus Struggling Steve- a Matter of Belief and Track Record

Ever wonder why trading losses don’t seem to bother experienced traders as much as new traders?

Think about running another type of online business. If you had a track record of consistent revenue, would it bother you to spend money on marketing?

Of course not. At that moment, you believe you can spend money to make money. You believe you can produce profit.

The trader/entrepreneur believes this, because she has a track record.

New traders don’t have this belief, because they don’t have the track record yet, so trading losses take on a much bigger meaning for them.

So how does struggling Steve become Connie consistent? With a trading plan. A trading plan is a script. A script for profitable ideas.

Dependable trading revenue is a direct result of having a structure for producing winning trades. If you’re winging it” you don’t have a plan. If you are inconsistent, you don’t have a plan. If you have a plan and you’re inconsistent, my guess is you have more than one strategy.

Stick to one strategy, test it, improve it and and own it before you move on to multiple strategies.

Before a trader can accept losses flawlessly, they need to believe they can produce profits. Otherwise every loss is a  life and death, roller coaster of emotions.

To produce profits, consistent profits, and then big profits, you need an edge, a strategy that gets molded and adjusted into a trading plan that matches your unique goals and resources.

When a trader reaches this stage, trading losses are a business expense. Expected and accepted.

Trading Losses: Some other perspectives on the topic…

How to Overcome Large Trading Losses

A while back I wrote about the worst loss that I ever suffered in financial markets and how I handled that very difficult setback. Recently I’ve heard from several traders who have experienced something similar: having built up their accounts over time, they lost much of their profits in a short period of time.

In the wake of my large loss, there were three steps I took that were very helpful:

1) I stopped trading. I took the time to process what had happened, figure out what I had done wrong, and make radical changes in my approach to markets. When I returned to the markets, it was as a very different trader;

2) I refocused. I used the time away from trading to work on other aspects of my life and career. In doing that, I remained opportunity-focused and not regret-focused. I also stayed focused on what I could control, not on what I couldn’t;

3) I used the incident as motivation. The loss was so painful that I made sure that I would never go through such an episode again. I created a new balance between trading and the rest of my life so that I would never be dependent upon trading results for my happiness and fulfillment.

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Opinion: 7 ways to survive a painful stock-trading loss

A large trading loss can be devastating — not only financially, but emotionally

As defeating as losses feel, how we react to loss that is more important than the loss itself. Inexperienced traders suffering a large loss can become hijacked by their emotions. Some may try to trade through the pain, denying it, often creating more turmoil for themselves. Some may withdraw, sweeping the loss under the rug to avoid thinking about it. Others may hunker down and try to “trade better,” determined to recoup the loss.

None of these reactions is constructive. In fact, they can be destructive if you don’t learn how to handle losing trades. Subsequent trading decisions are fraught with emotions that can drive erratic behavior. Depending on the individual trader, they may cut winning trades prematurely, overtrade, overstay unprofitable positions, or engage in other unrewarding actions — all done out of fear of another loss.

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How I Deal With Trading Losses

“I’m the only person I know that’s lost a quarter of a billion dollars in one year… It’s very character building.”            — Steve Jobs

I have to say this up front:  I hate to lose.  I work very hard not to lose.  I have never gotten used to or accepted my losses.  As Paul Newman said, “Show me a good loser and I will show you a loser.”  The closest I’ve come is that I have learned to cope with my losses in a manner that results in the least amount of lingering collateral damage.

As I see it, there are two types of losses.

The first type of loss is simply a result of the laws of probability and is to be expected if you follow your methodology.  I tell my classes that I lose about 4 out of every 10 trades.  The novices in the class react by asking themselves why they are taking an investment class from such a loser.

The experienced investors nod their heads in approval.  The point is that when I lose, I cut my losses quickly to minimize the costs. When I have a winner, I let it run.  It works out to be a net positive as the winners more than compensate for the losers.  For you sports fans, another way to look at it might be to ask:  how much would a baseball team pay me if I hit only 6 out of 10 times at bat?

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