Losses are an inevitable part of trading. Various sources may try to convince us otherwise, presenting trading systems with an 80-90% win rate. A high win rate appeals to the people’s tendency of the desire to be right, thus attracting new buyers or subscribers of that “secret bulletproof method”.
The reality is it’s extremely hard to devise a truly profitable system with such a high win rate, and usually, such probability doesn’t last as the market environment changes. Even if you’re fortunate enough to find such an extremely high win rate system, it’s statistically guaranteed that you will experience at least three losses in a row somewhere during the few hundreds of trades.
A trading approach with a 100% hit rate doesn’t exist, so traders must learn to deal with losses to build a successful trading career.
You don’t even need a 50% hit rate to generate decent profits in the long run. What you need is an appropriate risk-to-reward ratio and the right mindset to keep your judgment objective even during lengthy losing streaks.
The right mindset for losses
Successful traders view losses in trading differently than, say, losing a wallet on the street. Common people are likely to experience the same mental response to the losses in financial markets as if some accident happened.
For successful traders, the losses are necessary, just like operational costs in traditional business. However, professionals keep the losses small, typically 1-5% per trade.
The proper short-term goal
If you’re a short-term trader that executes several trades per day, the proper short-term goal-setting is crucial. Many novice traders make the mistake of setting a daily monetary goal, say $100. So, what happens if you don’t manage to reach that goal? You’re likely to feel like a failure, which will surely blur your market judgment, making your next trade of bad quality.
You may be tempted to increase your lot size for no logical reason, just to reach that daily score. Overall, the pressure of making money is not a conducive mental state for trading.
On the other hand, imagine you’ve made $99, the day is coming to an end, and you’re eager to still meet your gain target. You’re risking to place a trade impulsively in something you perceive as a “quick buck.”
The point is when you place a trade, you never know the future outcome with 100% certainty. If you let your mental state be dependent on something you can’t control, your emotions will fluctuate, leading to losses due to bad decision-making.
The proper goals should be something in your control, such as following your trading plan.
There is more to life than trading
If your sole source of life satisfaction is trading, you’re in trouble. When the losing streak comes, you won’t have anywhere to be sheltered from the emotional pressure of accruing losses. You need to have something outside of trading to look forward to. Otherwise, it’s just a matter of time before you burn out and be caught in a cycle of placing low-quality trades.
There is so much more to life than trading. At the end of the day, we earn money trading to enjoy life. If you can’t find anything enjoyable outside of trading now, why would you suddenly find it later? Then what’s the point of money?
Spend time with family, friends, find something that makes you feel good about yourself, such as your favorite hobby. Something meaningful and enjoyable that’s not rooted in trading will help you to gain your confidence back, making your mindset suitable for profitable trading.
The strategies to cope with losses
Some people use the same coping strategies to deal with problems as adults as they did in childhood. Something that worked for a kid in a kindergarten to get their toy may not work to solve an issue with their boss in the office. Often people bring the same strategies to trading when they need to cope with inevitable losses.
Below are the five main ways to deal with losses in trading (just like with issues in life).
When a trader experiences a loss, there is a tendency to “confront” the market, trying to get their money back by intensively looking for and executing other trading setups right after the loss. Often such confrontation is manifested in revenge trading, trying to hit back the loss whatever it takes as soon as possible.
2. Ignore and avoid
Following this approach, a trader disregards any losses and keeps trading like nothing happened, ignoring any details of a previous losing trade. In some cases, it’s a viable strategy when the trading system is run as planned but merely goes through a normal drawdown. Traders sometimes experience losses regardless of the quality of setups they enter, so the ability to cold-headedly follow the system is an advantage.
What makes it dangerous is when you try to avoid or ignore the position that keeps going against you without any plans of cutting the loss.
3. Social support
We are social beings, so when we go through tough times, it’s often helpful to seek support from people we trust. The words of encouragement and comfort do amazing things to our psychology. However, speaking out to the wrong people or not taking the right measures in trading after being comforted can be detrimental.
4. Blaming yourself
People with a high sense of responsibility tend to beat themselves up over past mistakes. In trading, it’s expressed through regrets over losses and constant mental replays of losing trades. If left untreated, such patterns can cause traders to fear pulling a trigger, missing the proper entry, and chasing the move afterward.
5. Step back and investigate
The final approach to deal with losses is taking a pause and finding out the possible reasons behind a losing trade. Such a strategy is the most helpful in trading, as it allows traders to avoid emotional decisions and instead learn from the obstacles.
While the main strategy to deal with losses should be the fifth one, social support or even ignoring the trades’ outcomes can also be helpful. Traders should be mentally prepared for inevitable future losses, and some of the listed strategies will help build the appropriate character for consistent profits in the long run.
Leave a Reply