How to Deal with Losing Trades

How to deal with losing trades?

The emotional highs and lows from winning and losing are often felt as a rollercoaster by the trader. However, in this article I will tell you exactly what you need to do in order to remove crippling emotions from trading.

It's an inconvenient truth but no trading strategy is ever profitable the whole time. Nor is any trader. If they say they are, they are probably lying - it's their ego talking! Some strategies yield winning trades some of the time, other strategies can give winning trades most of the time...but no strategy can give the trader an uninterrupted flow of winners the whole time.

Losing money is never easy, especially if the trade set-up smelt good, felt good and, of course, fulfilled all of the rules for entry. Losing trades knock our confidence and our account balance. Learning with how to deal with losing trades is part of trading.

Losing money in the markets part and parcel of trading yet it's a topic which many do not like to talk about - not least those educators who perpetuate the dream of untold riches to the novice trader if only their unsuspecting prey spend $1000s of their hard earned money on a seminar or course.  Furthermore, once the novice is ready, or feels that they are ready to be set loose on a live trading account then they will experience the inevitable euphoria of both winning money from trading and the sense of abject horror and pulse-pounding bewilderment of losing.

Trading is 90% psychology and 10% strategy. The moment you accept this truism then the more receptive you will consciously and subconsciously actively improving your mindset and trader psychology - especially when it comes to implementing the following advice.

Don't have an emotional attachment to the outcome

If you have an emotional attachment to the outcome, you will more often than not be sorely disappointed. Yes, your trade could win or it could lose. You know the risks. Get over it!

Accept that trades can win and lose. But thanks to the way we trade, we are able to construct things so that we can win big and lose small. It means how to deal with losing trades will happen less often.

Thanks to our risk management techniques and from targeting trades with high reward potential, we can be safe in the knowledge that if the trade moves against us then we have only lost a pre-defined amount (your risk per trade) but if it goes in your favour then you stand to make a lot more.

Remember that markets are irrational and that anything can happen at any time. Accept that sometimes the best set-ups that you may deem to be 'dead certs' can turn against you without warning or explanation, losing you money.  Markets do not care what you do or where you are from - they will simply do their thing, for better or for worse.

Trading is an investment... investments go up and down

View your trader training as an investment in yourself (which according to people like Benjamin Franklin is the "best kind of investment") and your application of it as a long-term process that helps to grow your capital over a healthy period over time.

Be fair to yourself. Have realistic expectations as to what trading can get you over longer term time frame (ie. A year). It is inevitable that your trading account will fluctuate in value over the days, weeks and months as the variance delivers a random sequence of both wins and losses.

Having realistic expectations will make your goals far more attainable rather than becoming seduced by the hunt for the Holy Grail. Some of my shorter-term clients have gone off in search of it...few have come back alive with their accounts intact!

Remember that (at the time of writing), many high street banks barely give 1.5% interest on your annum. So, if you're targeting a 2% - 4% gain per month from your trading - and hitting your monthly target on a consistent basis, that's no bad thing! You will have still trounced most asset classes out there!

However, if you're looking to turn a $100 into a $100, 000, 000 account in under a year, then step aside...you're in the wrong industry!

No matter how big or how small your trading account is or whether you are at a net gain or a net loss, you should not realise this as an actual profit or loss unless you withdraw the sum from your trading account and it is safely in your bank account.

Celebrate losing the battle in order to win the war

Accept that the number of trade set-ups in the market which meet your rules for entry will be completely random from month to month. So, too, will be the number of winning trades to losing trades.

Not every trade you place is going to be a winner. In fact, some of the best looking trades out there with the highest profit potential could turn out to be duds. Providing you have faith in your strategy and it is profitable, the trick is to view losses as a short-term strategic battle which is lost in pursuit of winning the overall war. As Mark Douglas says in his book "Trading in the Zone", they are a necessary "business" expense prior to a win or even a string of winning trades.

Providing the trades meets your rules for entry, do not let a previous losing trade or string of losing trades deter you...it could be your great kahuna!

This is where having faith and holding onto your nerve is essential.

Do not watch your trades

I regularly tell my clients that this is the worst possible thing that they can do, as every fluctuation in price in favour of their trade and against them will fire both positive and negative emotions. Do this all day and it will leave you emotionally exhausted and you could easily find that emotions your trade has caused you will alter the way in which you interact with others and your environment.

Accept the risk you have placed on the trade as being what is lost in the worst possible scenario and the reward potential of what you could gain if things go in your favour. Set the trade up, put the mouse down and walk away from that blasted computer!

Always go for high reward

Having a limit on how much you are prepared to lose if the trade goes against you (trade sizing) as well as the requirement to only trade set-ups which have a high reward potential will keep the wins big and the losers small.

Perhaps you will do what I do and only trade set-ups with a minimum of a 3:1 reward/risk profile (where I can hope to make $300 while risking $100 in pursuit of this).

Always having a decent reward will dramatically help to rationalise your trading decisions - especially at times of drawdown. After all, what is the worst possible thing that could happen if you take the trade? You lose $100. But what is the worst possible thing that could happen if you do not take the trade? You could potentially lose out on a profit of $300!

Take ownership - Don't listen to others

Every Tom, Dick, Harry, Sharon and Stacey have an opinion on where the market is going to go or whether it should down. Unless they are trading your trading style in your trading strategy and are profitably then don't indulge others by taking tips from them. If they recommend a trade and it loses money...who's fault is it? Yours. Take ownership and accept that most people out there love to talk a good game and swing the bat. A journalist told me off the record that: "You don't really have to know anything about the markets to seem knowledgeable about them or report them". Case in point!

See the bigger picture

Did you choose trading for a quick buck or rather to obtain long-term capital growth? How to deal with losing trades sometimes requires facing up to oneself. Those who see the bigger picture fall into the camp of the latter.

Do not fall into the trap of shifting trading styles of strategies as a knee-jerk reaction after a couple of losing trades. Thanks to variance and the flow of winners and losing trades any strategy or system manifests, you will typically be missing out on a flow of trades with a winning outcome.

Give your style of trading/strategy a chance. If you trade end of day, it may be 6 months - year in terms of time - or a sample of 20 trades. This will enable you to get a more representative picture over how a strategy can work for you.

I sometimes get the occasional client who decides to leave the signal service after we call two losing trades in a row based on the fact that the strategy "doesn't work". Just giving a strategy two changes to prove itself is very much like asking two people out of 100 whether they prefer beer or wine, and calling the results conclusive...best of luck to them

Review your strategy

If you are in a prolonged period of drawdown, instead of simply trading in anticipation of a string of winning trades you could take the initiative to review your strategy. So that you can see what you could do differently and see if the new tweaks or changes yield a more positive outcome. Sometimes all it takes is one extra ingredient, rule or filter in a strategy's rules for entry to turn a loss making strategy into a profitable one.

But, for this, it's time to get your hands dirty! Identify a modification, back-test it on the trades you would have otherwise have taken and see how it would affect things for you. Will it affect things for better or for worse? It is this very routine that many traders simply do not bother with.