You probably know that you can’t win all your trades. But understanding that a winrate of 100% isn’t achievable and knowing how to effectively deal with losses when they occur are two very different things.
A baseball player who strikes 30% is considered world class, a basketball player who scores 45% is one of the greatest of all time and the best soccer player in the world has a shot accuracy of less than 40%.
In trading, traders go broke with winrates as high as 50% or above. Theoretically, a winrate of 50% should be more than enough for any trader to achieve all the success he is after. However, not knowing how to deal with losses is what breaks traders and it’s one of the main reason why traders struggle so much.
The following 9 tips help you deal with losses in a much better way.
1 – Avoid over-analysis
There are just two types of losing trades:
- The ones where you failed: breaking rules, undisciplined trading, emotional trading, wrong risk management
- The ones where markets failed: even the best pattern will fail often. It’s just how trading works
Don’t try to overcomplicate things. The first step is always to categorize your trade and see if it was your own fault or if you did everything correctly.
Avoid using new indicators or other trading tools to find out if a loss could have been avoided. Only evaluate your trade based on your own system and analysis.
Edgewonk tip: Create a Custom Statistic around the outcome of your loss in your Edgewonk journal. This will give great new insights
2 – Audit your trade: improve the process
In Edgewonk, you assign tags for your entry, exit and trade management to individual trades and you can also grade your trades by quality. If you see that your comments are mostly negative and that it causes your Tiltmeter to rise, analyze what happened exactly. Why did you make the mistake? What caused your negative trading behavior? Is this a common pattern in your trading that is costing you a lot of money?
If you assign positive comments that show discipline and good trading behavior, your Tiltmeter will grow positive. You can be proud of yourself for sticking to the plan and executing your trade correctly.
This approach shows the difference between a process-oriented trader and a results-oriented trader. Accept the Tiltmeter challenge and try to always keep it green. There is a reason why the Tiltmeter channel is the first one in our trader development program.
3 – Analyze your risk
Did you use reasonable position sizing and money management? Did you place your stop at a price level that makes sense? Did you widen your stop loss when price moved against you and you became scared? Did you take profits too early without seeing actual exit signals?
Risk is an important aspect in trading. It’s not only about choosing how many contracts to buy/sell, but also how you manage your trade and your positions overall. Too often, traders fail because they manage their trades incorrectly, driven by emotions.
Your actions as a trader should be as consistent as possible to get consistent results.
4 – Accept randomness
We have said it in the beginning: either the markets just did not react as you anticipated and the loss could not have been avoided, or you made a mistake and the loss was your fault.
However, don’t try to justify a bad trade. Be honest and take responsibility. A trader who lacks self-awareness and does not accept responsibility robs himself of the ability to grow.
5 – Believe in yourself
Don’t beat yourself up after a loss. Do you think that the professional athletes you see on TV always start doubting their whole game after a loss? Do you think that the top business men go home and talk themselves down after making a bad decision?
You have to stay in control. Positive self-talk, as long as it is not delusionary, is very important and confidence is vital for a successful trader. Every trade is a risk and not always does it work out, but you need confidence in yourself to keep trading at your best.
6 – Understand when you are wrong
Trying to force a losing trade to turn into a winner almost always ends in a disaster. You have to be able to close your trade for a loss and be completely indifferent about the outcome. Don’t widen your stop to “give it time to develop” or add to a loser because “you want to get out faster”.
Many traders can trade well for some time but then get wiped out because they are neglecting the importance of cutting losses.
7 – Stay courageous
After a loss, don’t lose your confidence. Not capitalizing on the next trading opportunity and missing potential profits can lead to even more emotional trading. Losing a trade, then missing the next profitable trade sets you up for failure; when you then jump on the next best trade that did not quite meet your criteria it, of course, almost always results into another loss.
Stay focused and always bring your A-game.
8 – Walk away from your trades
If you just can’t deal with losing, walk away from your computer. This technique is especially helpful for beginners. Getting a new perspective and coming back to your platform with a neutral view can often make a big difference.
A loss is just a loss but when we are in the middle of our trading session we give it too much importance. You need to be able to put things in the right perspective.
9 – One trade doesn’t mean anything
The problem with 99% of traders is that they give one single trade way too much weight. Over the course of 5 – 10 years, one single trade is meaningless. You will probably take thousands of trades over that period of time. Why do you allow one trade to wipe out your account or turn into a loss that will take you weeks to recover from?
Imagine Messi (the best soccer player playing) would put so much emphasize on one shot that his whole career depended on it. Or do you think Apple would put their whole reputation and decades of hard work on the line for just one product? Trading is risky, but you have to take calculated risks and know how to deal when things don’t work out.