A large percentage of traders look at trading losses as a major disaster, even when it’s only a small loss. They attach all sorts of crazy meanings to the loss and beat themselves up. They’ll say things like “I’m a failure” or “my trading system doesn’t work” and picture themselves as some kind of loser. No wonder they’re stressed out when they trade.
You must now realize losses are a natural part of trading. As traders we take bets on the market. We go long to bet the market is going up and go short to bet the market is coming down. Even if you’re a market neutral trader, you’re still making bets! You’re betting the market won’t be too volatile or move too far in either direction. Everyone takes bets. We might be putting the odds in our favor and we may be able to adjust to market moves to increase our odds but they’re bets just the same. That being the case, the market will periodically take your money no matter how great of a trader you are or how wonderful your system is. Get used to it. Even the best and most profitable traders in the world lose and lose often.
It’s time we looked at losses in a new way. A good healthy loss can be one of your greatest assets. While initially a loss can be quite painful, realize that if you focus on the pain of your losses you are avoiding the valuable lessons you can learn from them. When an inevitable loss occurs it’s important to shake it off, step back, and examine the defeat for its potential lessons.
The lessons of defeat can be very helpful in reevaluating your approach, fine tuning your strategy, and strengthening your determination. Make sure you keep a trade journal and a trading psychology journal so you can dissect the trade as well your thinking to detect any flaws in your plan, your thinking or your execution. Then, adjust your approach as needed so you do better next time. Always keep in mind that your plan may be perfect, your mindset right on, and your execution flawless and you can still lose. In which case, give yourself a reward for doing a great job and move on.
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