How to Handle Losing Trades Like a Pro

05/14/2015 8:00 am EST

Focus: STRATEGIES

No trader can eliminate losses, but every trader can choose how they respond following a losing trade. Doing so effectively can help them to quickly earn back that loss and then some, says Jeff White of TheStockBandit.com.

We all lose here and there; it's just part of trading. You can't avoid it, but that isn't the issue. Where many traders struggle is how to handle a loss gracefully.

Instead of equating a trading loss with personal failure, shift your mentality for what a loss means.

Does it mean you're stupid? Not necessarily.

Does it mean you were wrong? Yes, in at least one way.

Does that mean you will never get it back? Absolutely not.

Losses are an event, yes, but it's also a distribution from your account. Consider them a cost of doing business as a trader. Brick-and-mortar stores have overhead, but as a trader, the biggest portion of your overhead is the losses you take.

When businesses cut costs, they're reducing their overhead as much as possible to fatten their profit margins. Do the same with your trading. Reduce your "loss overhead" by accepting a loss quickly and moving on to the next trade.

It's much more fun to always be adding to your account rather than seeing funds flow out, but as soon as you start viewing trading losses as something impersonal, it's going to change your perspective in a very helpful way.

Rather than fret over them and allow losses to cloud your thinking or alter your mood, viewing them through the proper lens will help you more quickly get them back and then some.

It can be that simple. When you're trading well, it might feel easy, but when the tough stretches arrive again (and they will), you'll be reminded that it's hard. As they say, "If it were easy..."

Contrary to what most traders think, the hard part of trading isn't being right or wrong. Each of us will find ourselves in winning trades and losing trades at times. Even random entries can produce (at least temporary) profits. Discomfort is the hard part.

Discomfort in trading can be tied to either profits or losses.

For example, our minds seem hardwired to shun (perceived) failure, so some traders struggle in a big way to close out a losing position and instead waste time hoping for a turnaround which may or may not ever happen. It's uncomfortable for them to admit defeat and accept a small loss, so they usually pay big to try and avoid that.

Our minds can also have recency bias, so after a string of losses, it's tempting to book a winner-no matter how small-just to stop the bleeding and have a taste of success again.

NEXT: Manage Discomfort to Better Manage Your Trades

|pagebreak|

It can be uncomfortable to let open profits ride when you're clearly on the correct side of a trade; what if you give them back? You need this winner, right? 

That often leads to booking smaller gains as compared to what you were on track to get paid and that adds up big over the course of your month, or your year, or your career.

Discomfort can also be tied to our preferred trading time frame.

Some can't stand the erratic price action found on the intraday charts and they tend to respond with late or forced entries when daytrading. They get spooked out of good trades, opting instead to focus on the most recent five-minute bar rather than the overall direction that's taking place.

Others can't stand to give a stock an appropriate amount of wiggle room when swing trading, so they choke off what would be a good trade in favor of a stop that's too tight. Instead of positioning themselves smaller in order to weather the short-term shakeouts, they essentially overtrade by reacting to insignificant moves within the context of a bigger trend. Profits aren't allowed to pile up and their skittish approach keeps them frustrated by the big moves they were once a part of but since missed out on.

Here's my point: risk involves discomfort, so if you're constantly avoiding discomfort, you're avoiding risk. And by definition, risk must be taken in order to profit in the markets. The key is to manage that risk appropriately, which also means managing your discomfort appropriately.

There's no getting around discomfort in trading. Everyone has it, regardless of directional bias, time frame preference, or the market being traded.

Either you're uncomfortable with the results you're getting (e.g. overtrading, not sticking with good trades, staying too long in poor trades) or you're going to face some discomfort while denying yourself as you stay with a good position. That's going to include enduring pullbacks, watching some profits evaporate, and being patient while waiting for an acceleration move to occur.

In an instant-gratification society like ours, it's no wonder most traders fail. Have the courage to choose your discomfort ahead of time, so that by expecting it and mentally rehearsing what you'll likely face, you'll in turn be able to respond with good decisions.

Like it or not, trading is a business; how are you managing yours?

By Jeff White of TheStockBandit.com

Related Articles on STRATEGIES