Preparing for The Inevitable: Losses!
Even using a good trading system and good trading techniques, every trader will experience losses. These losses may be very large losses. And these large losses can deplete your trading account and serve as a source of stress for many traders. The extent of your losses will depend on many factors such as your trading system, your trade, other market factors, and, very importantly, how you handle the stress of losing money on a trade.
Most traders just consider losses as a business expense that one will incur from time to time. We should never ignore them, but we can control them. Investors Business Daily founder, William O’Neil, preached about the importance of cutting losses short when he said:
Whether you’re a new or experienced investor, the hardest lesson to learn is that you’re simply not going to be right all the time. And if you don’t cut every loss quickly, sooner or later you’ll suffer some very large losses.
That’s why losses are called “the inevitable.” But losses can be minimized. In fact, they should be if you want to continue trading! Stress related to these losses can also be minimized, particularly if you want to remain happy, healthy, and trading.
In addition to other stress-controlling techniques, you’ll find two stress-busting measures in the next section that can help any trader suffering stress from a major loss.
Two Important Steps After a Losing Trade
- Take a “detox” day.
Go “cold turkey” from trading for a day or even a week. During this detox day, take a break from all thoughts of trading, entering or exiting a trade, and even watching the market. After taking your detox period, you can return to trading.
It might be difficult, but remember that every trader has to “get back in the saddle” again. Staying away from trading for too long makes it very difficult to start trading again. I know one trader who left the market for two years after losing almost $50,000 on a single, foolishly-entered trade. He came back, but his skills were diminished and it was very difficult to overcome his fear. Take your detox day then come back to trading.
- Learn from the trade.
Analyze what happened to cause your losses. Consider how your trading system worked and how you worked in it. Also, consider how you could have performed better in the trade. Do not second guess the decisions that you made or that your trading system suggested. Write down three lessons you learned from this trade. The loss then becomes tuition for your trading education rather than just a loss.
One Final Word
Remember that even the most successful traders experience losses. Yes, this applies to every trader. There are no exceptions to this rule. You must let go of the losing trade and move on to the next trade. But always remember the lessons you learned.