How Successful Traders Come Back Mentally Stronger After A 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.
How a Trading Loss is Handled
One major difference between successful traders and failed ones is how they handle trading losses. Successful traders treat losses as an opportunity to learn and improve their trading. Coming back from a large loss is challenging, but success is never accomplished by denying, withdrawing from, or ignoring trading losses. Losses — especially substantial ones — can be opportunities to become a more skillful trader.
Here are seven steps successful traders take after a loss to become emotionally stronger and more disciplined:
1. Accept responsibility: You made the loss; be sure to own it. Don’t brush it aside, hide from it, or blame the “smart money” for your loss. When you take ownership, you control your trading — and that’s exactly where you want to be.
2. Stop trading: Take a short break to figure out what went wrong. Assess what happened by reviewing events carefully. Think about where you fell short. For example, did you take too much risk? Was the trade well-planned? Were you mentally sharp, or did you hold a losing trade hoping to avoid a loss?
3. Have a plan: Make a detailed action plan for future trades. The ingredients of your plan should include things you will do differently (e.g., setting and honoring a stop) and also what you will no longer do (e.g., holding a loser, hoping it will return to break-even).
4. Make a better plan: Can you identify factors from this trade that could be used to reverse the trade position? Good traders will take the loss as a stop-out and wait for the next opportunity. Better traders will reverse their trade — if market conditions permit — and make up not only for the initial loss but add profits to their bottom line.
Most trades that go strongly against us do so because of detectable reasons. Can you identify key market actions (e.g., changes in momentum, volume levels, price activity) that you can recognize and profit from? This will give you clear criteria for a trade not working and a fresh, new edge. Equipped like this, you are far less likely to suffer large losses in the future.
5. Put your loss in perspective: You are more than your trades. You have other roles that are important to you and others. One trading loss — even a large one, doesn’t define your worth. Getting perspective on your life when the chips are down helps restore balance so you can take steps to turn your trading around.
6. Be inspired: Use this loss as motivation for learning and develop your skills for better trading. The best professional athletes become excited when they discover they have a weakness in their game. They use the weakness as a catalyst to improve.
7. Get back in the game: Once you’ve done the recovery work, trade again. You’re mentally stronger and better-prepared than you were. Let the loss go and put your good intentions into practice.
Note: A version of this article originally appeared in Market Watch.
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