How to Transform Pain into Profitable Trading

"Are you OK; that looks like it hurts? Here, let me help you…." Words you often hear along life's journey, but practically never when trying to find your way towards profitable trading. So today, I ask you: Are you OK in your trading, or are you, like so many new traders, really struggling with frequent losses and difficult lessons? Maybe you've even blown up your first trading account?

If so, they didn't tell you about this in the commercials or clever marketing pieces, did they? And now, you find yourself rattled and upset, and feel unsure of yourself and your trading methods. Maybe you're even thinking of going off strategy or revenge trading at this point; that is, if you plan to even continue trading at all.   

I could tell you all about how I've been there—most any successful trader could, too—but that's probably not much help or comfort to you in the moment. Here's something that might be, though: Logical steps for traders to take that can ultimately help you turn these inevitable "hard knocks" into stepping stones on your long-term path to profitable trading.

Whatever You Do, Don't Trade on "Tilt"

Maybe first, a small caveat: An isolated losing streak is no reason to hit the "panic" button, especially if you've achieved profitable trading using a particular strategy before. In fact, if your losses are small each time and are allowed by your strategy, it's possible that there's no problem. If you feel lost, though, and certainly if your trading account has been decimated by just one or a few trades, then you need to suspend trading, and do it right away!

Serious account damage is never an acceptable trading result, and is typically a sign of one if not all of these three things:

• Faulty (or perhaps non-existent) risk management
• Improper execution of your trading strategy
• (And least common) Market conditions that don't suit your strategy

Alone or taken together, these catalysts produce disastrous losing trades, but complete ruin happens when traders "go on tilt," trading off strategy while guided only by emotions like anger, greed, and revenge. Just one trade taken "on tilt" could be your last one ever, which is why pain is always a signal to stop trading, while you still have account capital and the ability to get back on a path to profitable trading.

Objectively Assess What's Preventing Profitable Trading

Coming to such an emotionally-charged stopping point means you're not going to simply resume profitable trading the next morning like nothing ever happened. Your new job: Analyze your strategy and previous trades to identify your problems and potential solutions.

To do it, consult a mentor, trading coach, or experienced trader, maybe attend a trader conference, and read all the unbiased, targeted information you can get your hands on. In short, make it your mission to learn and improve, not to simply trade and make money doing it!

If you're taking sub-par set-ups, carefully study and document in your trade journal what the qualities of a trade-worthy set-up are so you can refer to it often. If risk management is a problem, then you need to develop a complete methodology for stop placement, profit targets, and scaling out of positions to safeguard hard-earned profits. And if you have weaknesses across multiple disciplines, then you'll likely have to simplify your trading, perhaps by identifying the one set-up and strategy you'll carry with you when you resume. By using it to bring about newfound knowledge and improvement, pain can ultimately become a catalyst for more profitable trading in the future.

Test Yourself & Enforce Compliance by Demo Trading First

It may be weeks or even several months before your next real-money trade, and if profitable trading for the long term is your goal, then that should be just fine with you! Stepping back to re-assess and refine your methods is an investment in your future, and a steady diet of demo trading is how you'll begin to implement your changes and engrain new trading habits. You should also create a reward and punishment system to promote your continued plan compliance.

Demo trading is a great way to work at a slower pace, experiment with new patterns and set-ups, test multiple or higher time frames, and develop consistency and repetition without money interfering in the equation. Refer to your notes and trade journal often during this time, and focus only on improving your methods at first. In essence, the kind of calm focus and clear intent that you'll bring to demo trading is what you want to re-create under real conditions.

Keep working at it for an extended period, monitoring your progress and plan compliance, as well as the results of your trades. Only when you feel comfortable and confident in your methods and have achieved profitable trading over a large sample size should you consider a return to real-money trading, and even then, you should start out by trading half size.

See also: Demo Trading vs. Live Trading: Know When You're Ready

Conclusion

Some call failure a mere fact of life for traders, so if you've "taken some lumps," donated "a pound of flesh" to the markets, or my least favorite, been "attending The School of Hard Knocks," well, you're in fine company. I've been there, and so, too, has every other successful trader I know. Your struggle, though, doesn't have to be the end of your story!

In fact, the world loves a great comeback, and failure just so happens to be an excellent teacher! So by suspending your own trading the moment you feel pain or fall on hard times, you'll survive to trade another day. You'll then take time to objectively identify and accept what you're doing wrong, and then work hard and purposefully to turn weaknesses into strengths using the reliable information you now have. Unlike many, you can have a second chance at profitable trading, and any future success will be even sweeter knowing the struggles you had to endure to get there!