Whether you're day trading, swing trading, or investing, losses are something you will have to deal with in the stock market. Unfortunately, a lot of times that is much easier said than done. Trading losses can often affect the way you trade following them, many times leading to more losses and even losing streaks. As a full-time trader myself, I've had to deal with many losses over the years and wanted to share some tips and advice for dealing with trading losses and avoiding the dreaded losing streak that so many traders fall into after a single loss!
Before getting into the tips, I wanted to share a personal trading story to emphasize how important it is to handle losses gracefully. I put a screenshot of one of my biggest losses below. This was years ago, and at the time it was by far my biggest loss. This one single loss wiped out several months of progress that was made before it. Like any other inexperienced trader... I let it get into my head far too much, which actually caused me to take multiple other fairly larges losses immediately after it. I didn't get past it and start making forward progress with my trading again until I finally looked at the loss as a lesson and let it prepare me for future trades more, rather than drag me down.
That leads me to the first tip on how to deal with trading losses: Take a break! If you've just taken a larger loss than you're used to, you probably won't be able to trade with a clear mind immediately after. It's important to take at least a few trading days off to let some of the frustration pass before you dive back into the market.
This alone can help you avoid many of the other rookie mistakes made after a trading loss that often leads traders straight into a losing streak! The same way we sometimes act out of anger in our daily lives, we also do with trading after a loss. Think about it... just about every time you act out of anger, you later think back on how you should have handled the situation differently. Trading immediately after a large loss is the equivalent of acting out of anger and taking a break afterwards will keep you from having to think "I should have handled that loss differently." You're able to ease your mind so you can get back to trading without your emotions getting in the way.
The next piece of advice I have should take place while you're taking your break from trading. You need to accept your loss and accept all responsibility for it! It's very easy to take a loss and then blame is on something like "market manipulation" or "that company is a scam," but doing this will never allow you to grow from your loss.
Realistically, manipulation and "scam" companies are just a part of the market. It's still up to you to making trading decisions with that information in mind. With that being said, while you take a break from trading try writing down why you took the loss and what you should have done differently. Again, make sure that you take responsibly for it so you can do things differently the next time and keep yourself from having to deal with big losses!
Some common things that I notice myself writing down when I'm taking responsibility for my large losses are "I should have cut losses much sooner" and "I had way too large of a position in the first place."
That leads me to the last tip for dealing with trading losses. Cut your trading size! When you're ready to get back to your trading after your break, you shouldn't be starting back with your full position size. Whatever your full position size is for an average trade, whether it be $2,000 or $100,000, you should be using half of it in my opinion.
The idea behind this is simply to rebuild your confidence after your loss. Believe it or not, confidence actually plays a huge role in successful trading. When you're confident, you don't second guess yourself before entering or exiting, which keeps you from missing out on the best trades (assuming you're not overly-confident, which can be a whole different story).
Cutting your position sizes in half is an easy way to re-build your confidence with limited risk. Then, once you feel more comfortable trading again and your mind is no longer so focussed on your loss, you can gradually increase your positions back to whatever your average position size is and fully move on your trading loss!
I hope this helps with something that affects almost every trader, both new and experienced! This goes hand and hand with trading psychology, which is one of the many things taught in more detail here at Master the Market.
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