How to Bounce Back from a Losing Trade

08/25/2015 6:00 am EST

Focus: STRATEGIES

Gary Dayton

Founder, TradingPsychologyEdge.com

Let's face it, sustaining trading losses can be tough. No one likes losing money. As every trader will learn sooner or later, trading losses are a routine part of the game, says Gary Dayton of TradingPsychologyEdge.com.

Nevertheless, many traders find it difficult to accept inescapable trading losses.

When We Can't Accept a Loss

It is the ability to accept the occasional trading loss that can be a key factor in whether or not you become a profitable trader. I am not saying trading losses are encouraged; but how you handle losses may significantly affect your degree of trading success.

Refusing to tolerate and properly handle trades that don't work leads directly to trading errors. It is the inability to cope with the inevitable losing trade that causes traders to cut winning trades short, move stops in the middle of a trade, hold onto losing trades, average down, and fail to pull the trigger on sound trade set-ups.

Learning to accept and deal with trading losses may be just as important as making good trades.

Survival Tips

Here are seven steps you can take to survive and even thrive when suffering a loss:

  1. Write down the trade as it occurred: Don't sweep the loss under the rug! You need to learn from the loss (that's its value), so write it down. Include how you viewed the market at the time and how the market action and your indicators appeared to meet the criteria for a sound trade set-up.
  2. Evaluate the trade: Once the trading day is over, go back to what you wrote and see what can be learned. Did you misread the market? Was there something you failed to check? Did you take the trade even though it didn't meet your trade criteria? Or, was the trade set-up valid, and it just didn't work out?
  3. Use the loss as a learning opportunity: Ask yourself, "What did I learn from this trade?" Is there an insight about market action that can be gained? Is there something about your trading behavior that needs to be addressed? Whatever it is, you have an occasion to grasp something new, and that is valuable! 
  4. Take immediate corrective action: Do you need to modify your trade set-up? Is there a rule for personal discipline you need to put in place? Whatever you have learned, take immediate action.
  5. Keep your head and attitude right: You always have a choice about attitude. You can accept the loss as an inevitable part of trading and be grateful that you can learn from it, or you can enter a negative, downward spiral of feeling bad, getting down on yourself, and making yourself feel miserable. Follow the constructive steps outlined here and stay above all of this.
  6. Remember, trading is based in probabilities: Every trade set-up has a probability of winning and a probability for loss. Over a large number of trades, a set-up with an edge will be profitable. Any given trade is always uncertain. This is the law of trading probability.
  7. Turn to others: We all need support. Talk to a trusted trading buddy, mentor, partner, or spouse. It helps to unload a bit, and you may gain a different perspective.

Put these seven steps into place and you will be on the road to surviving and even thriving from losses. 

By Dr. Gary Dayton of Trading Psychology Edge

You can learn more about trading psychology at Gary Dayton's Web site, including several free downloads you can use to build your mental skills.

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