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How To Deal With Trading Losses

By April 28, 2020 how to

Don’t you just hate losing? It doesn’t really matter whether you’ve just lost at rock paper scissors or at something far more significant, the immediate psychological response is always the same. When you don’t hear the applause, the fanfares and there is no crown of laurel in sight, this can only mean one thing: someone else is celebrating their victory. 

When you enter the stock market you must always remember this one crucial fact: you cannot always win. It is like knowing that one day you will die, however, having this piece of information doesn’t stop you from living and enjoying life, does it?

Emotional Mess

The biggest slap to your ego is to be on the losing end. Traders usually experience a hurricane of emotions when they encounter a failure: anger, frustration, hopelessness, panic, etc. Depending on the size of their loss and inability to take control over their emotions, some traders may eventually end up developing chronic depression.

For these and many other good reasons you should treat online trading as a business and not as entertainment or a hobby. The way you have to act composed and cool-headed within your office walls, the same business-like conduct is applicable during a trading session. Forex trading favours traders with political and economic awareness, good strategy and stable emotional state.

However, ego is only half of the problem and the sooner you become completely honest with yourself, the higher are your chances of a fast recovery. 

Greed

Greed is a silent enemy that pushes traders into making irrational decisions. Even when the numbers speak against a particular move, many traders get blinded by fleeting opportunities to get rich overnight. More often than not, traders put on the line way more than they can afford to lose in pursuit of the phantom millionaire status. The trading account they have been growing for months can be gove in minutes.

SMDD (Same Mistake Different Day)

At this point, a trader is an emotional wreck. Devastated, he is desperate to win his money back and pumps in more and more money. This aggravates the dire situation even further, as now the trader’s actions resemble those of a gambler, not an investor. 

After a substantial loss, the best plan of action – we know this might sound controversial – is to stop. Take a pause to deal with your panic and anxiety. Only when you’re ready, go over your actions and strategy that have led to the negative result. Is there a flaw in your trading plan? Did you get carried away and overtraded? Did you get too confident in your skills? Speak to your financial advisor for an unbiased opinion and seek professional advice. 

Back To The Drawing Board

Once you’ve identified that your strategy is flawed, it’s time to research whether it can be improved or switch to a new one. The reason why various strategies exist is because every trader has their own style and risk tolerance. At the end of the day, it’s not the matter of one approach being better than the other, but the trader’s character and stress resistance.

Before settling on your next strategy, sample a few first. Remember, the demo account is perfect for learning and experimenting when you’re not ready to risk your own capital. Put your theories through test and trial to find the one that compliments your trading style.

Identify the reason for your loss. Take ownership of your mistakes. Fix your strategy.

Final Thoughts

Stock market is an inexhaustible source of trading opportunities, big and small. For that reason, you don’t need to risk everything you have on a single deal, no matter how lucrative it may seem. Don’t allow your losses to spiral out of control. Accept the fact that you can’t win every time and own your mistakes. At the end of the day, every mistake teaches you a valuable lesson in trading, so learn from it.