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Thursday, September 1, 2016

Elevate Your Trading: 5 Tips on Trading Losses

by Gary Dayton
“I avoid trading losses at all costs; I hate losses!" "Trading losses are just awful!  I can’t stand them." "When I have a trading loss, it just shows I'm not a good trader, husband, father, provider, … or person!"How many of us have such thoughts about trading losses? Most, I would imagine, though we never talk about them. We may not even acknowledge them, but they are important. Such thoughts cause us to cut winners short, hold onto losing trades, avoid pulling the trigger, and even over trade by entering a marginal position or doubling down with position size to make up for that last loss.
Impact of Our Thoughts on Losses
How we think about losses is important. Our thoughts about losses directly influence our trading behavior. They can affect how we see ourselves as traders and our self-esteem. Thinking about losses in an unconstructive manner can create a negative trading spiral and actually compound our losses.  Thinking losses are just dreadful, we actively try to avoid them in unsound ways.  We commit defensive trading behaviors like cutting winners short, letting losers run, etc. These erratic trading actions may cause even greater losses, further reinforcing the notion that losses are bad. Self-esteem and confidence wither, setting us up for more of the same on the next trade.
The reality is trading losses will happen continuously throughout your trading career. They are inevitable and unavoidable. With practice and experience, losses happen less frequently, but you cannot eliminate them completely.
Reasons for Losses
Losses occur for two primary reasons: 1) we make mistakes and 2) the market context changes.
We are human and trading is complex. Trading is very demanding on our mental and emotional capacities; it is hard not to make mistakes. Also, the market constantly changes. A trade setup that worked yesterday may not work today because the market context is now different. Trading is based on probabilities, meaning that there is always a certain likelihood of loss in any trade setup.
If we think unconstructively about losses, we are sure to struggle with our trading.  Here are five tips that can help you re-set your thinking and attitude about losses:
5 Tips on Trading Losses
  1. Accept Losses. Instead of viewing them as awful, recognize that they are a natural part of the game. No one wins 100% of the time. Every professional trader had losses. Give yourself permission to have losses and accept the probabilistic truth of trading.

  1. Commit to Trading Well. Even when you might be thinking negative thoughts about a potential loss, be steadfast in following your trading plan. Manage your trade by what you see in the price movement and indicators, not by what your mind is saying to you.

  1. Use losses to learn. This is what the best traders do.  Learn about yourself as a trader and about the market through your losses. Are you doing things that you can improve on when you have a loss? Did the market context change and show you that the trade was unlikely to work? Use this information with future trades.

  1. Trade with an Edge. Make sure all your trade setups have a probability of working and an expectancy of producing profit. Write them down in your trading plan and work only your plan. This is the only way you will generate profit consistent with your edge.

  1. Study market context. Any trade setup will work better in some market conditions than others. Know the context in which your setup works best and the context in which it doesn’t work as well. This will improve your edge and reduce the frequency of losing trades.
Reviewing your trades is an excellent way to learn from losses and better understand market context

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