A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Bouncing Back from a Losing Day
11/08/2011 9:35 am EST
Traders need to block out certain emotions that come with losing trading days, says Pratik Patel, explaining how to stay calm and focused and keep losses from piling up.
Your mental attitude is part of your trading strategy, and it is very important. So how do you react when you have a big day, and then a day that’s not gone very well and you’ve lost money? How do you bounce back from the losing days?
Our guest today is Pratik Patel to talk about that. So Pratik, obviously we want to have a lot more of those big days, but sometimes it’s not going to happen and we’re going to lose money. How do I bounce back and get right back in the market with confidence?
It’s more about emotions. I think 90 %, 80% of trading is emotions and psychology. You know, 10% is the market.
The market’s either going to go up, down, or sideways, so there’s not too much to it. I think it’s more of how a trader behaves or reacts to certain things in the market.
I feel like a lot of new traders, and from personal experience, when I first started off, I’d have a big day, I’m really excited, and then a week later, I have a down day and I’m really upset.
One thing that I wasn’t understanding is I need to treat it almost the same. It’s like a business.
Let’s say you own a retail store. Your business is doing well, you’re excited, but let’s say you have loss prevention and you lose some money. You’re not going to shut down your business. You’re just going to accept that’s part of business, the loss, and you learn from those mistakes.
So I think one thing is to prepare yourself, and also, a lot of traders don’t want to accept losses, period. A lot of new traders step into the game and they don’t want to take a loss. Accepting the fact of a loss can prepare you better if you realize it, and you accept the fact that before you even get into a trade, realize "I’m risking a certain amount; I might take a loss."
Let’s say you do take a bad hit on a day. Just accept it. It’s never a pretty day, but get back into it because you want to get back into the next trading session because there’s always going to be other opportunities.
Never be so hard on yourself if there’s a losing day. If you have a good day, you’re not going to get overly excited and quit trading. You’re going to get back into it. So you need to treat the losses almost the same.
So then you’d have kind of an even keel either way.
If I have a system that has taken four losses in a row or five losses in a row, even if they’re small, how do I know that I need to either make an adjustment to reading the markets, or maybe quit for that day? What do you recommend there?
Well, let’s say you have a good strategy and you’ve got maybe one loss out of four, but then it starts getting four losses and maybe one win. What you need to do is re-evaluate.
See if it is the trader, the system, or the market. A lot of times the market—especially recently with so much volatility—is going up and down in the blink of an eye. So you have to ask yourself if the market is behaving erratically or am I behaving erratically?
Maybe take a day off, take a week off. There’s nothing wrong with taking time away from the markets because one thing about trading, there’s always going to be another trading day. There’s always going to be another trading opportunity.
Never feel that you have to get back in the market right away, and never try to fight the market. If you lose and say "I’m going to get back in the market and show them who’s boss" and try to win again, and you’re getting more emotional, you’re not thinking rationally.
You’re thinking based off of technicals or thinking off your set-up, you’re just thinking "I just want to get back at the markets," the market’s not going to care if trader Joe or trader Bob lost money. It’s going to do what it wants to do.
So just take a hands-off approach; take a couple days off; take a breather and just re-analyze it.
The market will always be there for you.
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